Advanced Micro Devices, Inc. (NASDAQ: NASDAQ:AMD) plunged more than 8% on Thursday and was trading slightly higher when the markets opened on Friday.
The stock has plummeted about 25% lower over the course of the last nine trading days after entering into a steep downtrend on June 6 after forming a bearish triple top pattern at the $109.50 level on that day and the previous two days.
A downtrend occurs when a stock consistently makes a series of lower lows and lower highs on the chart.
The lower lows indicate the bears are in control while the intermittent lower highs indicate consolidation periods.
Traders can use moving averages to help identify a downtrend with descending lower timeframe moving averages (such as the eight-day or 21-day exponential moving averages) indicating the stock is in a steep shorter-term downtrend and descending longer-term moving averages (such as the 200-day simple moving average) indicating a long-term downtrend.
A stock often signals when the lower low is in by printing a reversal candlestick, such as a doji, bullish engulfing or hammer candlestick. Likewise, the lower high could be signaled when a doji, gravestone or dragonfly candlestick is printed. Moreover, the lower lows and lower highs often take place at resistance and support levels.
In a downtrend the "trend is your friend" until it’s not and there are ways for both bullish and bearish traders to participate in the stock:
- Bearish traders who are already holding a position in a stock can feel confident the downtrend will continue unless the stock makes a higher high. Traders looking to take a position in a stock trading in a downtrend can usually find the safest entry on the lower high.
- Bullish traders can enter the trade on the lower low and exit on the lower high. These traders can also enter when the downtrend breaks and the stock makes a higher high indicating a reversal into an uptrend may be in the cards.
The AMD Chart: AMD's most recent lower high in its downtrend was printed on Wednesday at $90.86 and the most recent confirmed lower low was formed at the $85.82 mark the day prior.
- On Thursday, AMD fell to the $80.62 level but bounced up slightly, which caused the stock to form a small lower shadow. If the lower shadow is recognized, AMD may bounce up slightly on Friday.
- The second most likely scenario is that the stock will form an inside bar pattern in consolidation. If that happens, the next move is likely to be bearish because AMD was trading lower before forming the pattern.
- Bears want to see follow through on Friday because Thursday’s move lower took place on higher-than-average bearish volume. There were 102.43 million AMD shares that exchanged hands during Thursday’s trading session compared to the 10-day average of 98.04 million. When a stock has a higher-than-average bearish volume it suggests fear selling is taking place, which favors the bears.
- AMD is likely to bounce up and print at least a lower high over the coming trading days because on Thursday the stock’s relative strength index fell to the 343% level. When a stock’s RSI reaches or falls below 30% it becomes oversold, which can be a buy signal for technical traders.
- The stock has resistance above at $84.24 and $87.45 and support below at $79.70 and $76.84.
See Also: How to Read Candlestick Charts for Beginners
Photo: Courtesy AMD
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