A Retracement Swing Trade for Advanced Micro Devices (AMD)

01/08/2010 12:01 am EST

Focus: STOCKS

While I would be the last technician to recommend that anyone buy a stock that has just made a terrific uptrending move, the fact remains that such stocks often become excellent long swing trade candidates on retracement moves back down to major support areas. Advanced Micro Devices (AMD) shares boast three such areas.


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FIGURE 1: AMD, WEEKLY. Three distinct Fibonacci retracement support levels all coincide between $6.50 and $7.00; the 21-week and 50-week EMAs may also offer enough support on a pullback for daily swing traders to capitalize on a bounce higher.

Figure 1 is the weekly chart for AMD. The uptrend is well established, with the spread between the 21-week (red line) exponential moving average (EMA) and the 50-week EMA continuing to expand. Prices look as if they're getting toppy, however, and the chances of a pullback grow larger with the passing of every trading day. Long-term AMD bulls shouldn't mind one bit, though, because they may have three solid opportunities to initiate new long positions at these support levels:

1. The 21-week EMA (red line) is usually a first stop for any stock or commodity in retrace mode. Swing traders might want to drop down to a daily chart to monitor for swing trade entry points if AMD pulls back to the 21-week EMA. This could be a relatively low-risk trade as long as traders use a daily swing low as the initial stop and they shoot for reasonable profit targets. Even though the 21-week EMA is well below prices now, it will continue to rise for some time, even if a pullback commences right away.

2. The next area of support is even more formidable; it's known as a Fibonacci confluence support area that spans the range from about $6.50 t0 $7.00. If you look closely, you'll note that the confluence area is formed by plotting the Fibonacci retracement levels for three different price swings in AMD. In this case, the 38% retracement of the longest swing coincides with the 50% retracement of the mid-length swing and the 62% swing of the most recent swing.

While not a foolproof way to project support (resistance) levels, in many cases, such a confluence area will be strong enough to allow the tradable in question to mount a convincing rebound back in the direction of the primary trend. In addition, if the pullback toward such a confluence zone is more gradual in nature, rather than taking the form of a violent trend reversal, the odds increase that a nice tradable bounce can be exploited. Again, more conservative traders might want to watch for long swing trade entries on their daily AMD charts should prices dip into that $6.50 to $7.00 support zone.

3. The final support level likely to offer notable support is the 50-week EMA (blue line). It's way below the current price of the stock at present, but just like its 21-week counterpart, it will keep rising for a number of weeks, even if AMD shares start to reverse. If the 50-week EMA is in the area of the light blue confluence zone on a retracement move by the stock, it would provide even more validity to the strength of the confluence support area.

No one knows if AMD will continue its upward movement in the new year, much less if the broad US markets will also persist in their bullish tendencies, but at the very least, we know in advance where AMD is 90% certain to find solid support, should it pull back toward the $6.50 to $7.00. Sure, with that knowledge and a buck and a half, you might be able to ride the bus, but with the added confidence that you may be able to turn that particular Fibonacci support zone into some serious cash with a well-timed swing trade entry.

By Donald Pendergast, Jr. of ChartW59.com

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