Advanced Micro Devices’ (AMD) stock price movement is not in sync with its fundamentals, probably because stockholders may be reacting to recent news irrationally. The best way to understand all the noise is through technical indicators, in which the focus is only on the volume of trade and the intensity of price movements.
200-day moving average
When a stock’s short-term moving average is higher than its long-term moving average, it shows technical strength and indicates positive investor sentiments. The 200-day moving average shows a stock’s resistance when its price is below the 200-day moving average and its support when its price is above the 200-day moving average. If a stock falls below its 200-day moving average, it’s believed to be in a downtrend, and vice versa.
As we can see in the graph above, AMD is currently trading at $9.98, far below its 200-day moving average of $12.15. On the other hand, Intel and NVIDIA are both trading above their 200-day moving averages.
This shows that AMD has gone into a downtrend, nullifying all the growth it’s seen over the last 200 days. When the stock broke its resistance and fell below $12.15, many automated trades that base their buy and sell decisions on technical analysis went into sell mode, creating a situation of overselling. While the moving average stated that AMD is a “sell,” the RSI (relative strength index) stated otherwise.
J. Welles Wilder believes that when there’s a greater-than-average stock price momentum, there comes a point at which a stock is eventually considered overbought, creating a selling opportunity. Wilder developed the RSI to measure the point at which a selling or buying opportunity arises. RSI is measured on a scale of 0–100, with lower than 30 indicating oversold status, greater than 70 indicating overbought status, and ~50 indicating no buying or selling trend.
On April 10, 2018, AMD had an RSI of 35, whereas Intel (INTC) and NVIDIA (NVDA) had RSIs of 49.3 and 39.5, respectively. A few days earlier, at the start of April, AMD was oversold. After a period of overselling, a stock becomes cheap. When it bottoms out, it can go nowhere but up. If its fundamentals are strong, long-term value investors take this as an opportunity to buy the stock, sending the price up.
Similar is the case for AMD. After it bottomed out to its 52-week low of $9.04 on April 4, 2018, it rose 5.7% and closed at $9.56 on April 5. In the next six days, it fell and rose, resulting in an overall rise of 4.4% to $9.98 on April 10.
While the technical trend is negative for AMD, there’s some hope from value investors. Next, let’s look at the stock’s valuation, which value investors consider when making buying and selling decisions.