AMD Shares Are Now Perched on a Precarious Precipice as a Critical Trendline Breach Looms

AMD (NASDAQ:AMD), an American semiconductor manufacturer formally known as Advanced Micro Devices, is under the laser focus of retail investors today as a critical trendline for the stock remains in play.

Most focused retail stocks
(live estimates past 12h)

1. $AMD
2. $NVDA
3. $PTON
4. $AMZN
5. $AAPL
6. $NIO
7. $F
8. $SOFI
9. $TSLA
10. $NFLX
…
17. $DATS

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— Breakout Point (@BreakoutPoint) January 21, 2022

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Since the start of 2022, AMD shares have been hammered along with the rest of high-beta tech stocks as the market continues to reprice equity risk premia amid an oncoming wave of monetary tightening that is likely to include around four interest rate hikes as well as the US Federal Reserve’s balance sheet contraction this year. In fact, since the start of the year, AMD shares are down over 18 percent.

Piper Sandler unleashed the latest bearish wave in AMD shares yesterday when it downgraded the stock to a Neutral rating from an earlier Overweight one. The investment bank also reduced its target for the stock from $140 to $130. The analyst Harsh Kumar cited concerns around an expected slowdown in the PC market, “earnings and growth headwind” from closing the Xilinx deal, and the “broader market dynamics around high-multiple, high-growth technology stocks” as the impetus for this downgrade.

This brings us to the crux of the matter. AMD shares are now balanced at a critical trendline that extends all the way back to May 2021. Should the stock decisively breach this trendline, it would skew the sentiment around AMD shares toward the bearish camp.

Despite these dire omens, there is currently a roughly even probability of the trendline holding. First, the breach area currently resides within a demand zone (I’ve bounded this region in green color), thereby increasing the odds of a rebound for AMD shares. Second, Nomura expects the ongoing weakness in the tech sector to stabilize once $3.3 trillion in notional option contracts expire today. Why is this important? Well, due to the elevated demand for puts in recent days, options dealers have sold sizable put contracts. This means that these dealers are exposed to negative delta on these contracts, thereby necessitating negative gamma hedging. As a refresher, selling a put is roughly equivalent to buying shares in the underlying stock. Consequently, in order to hedge this negative gamma, dealers have been periodically shorting pertinent stocks. In good news, this regime should stabilize after today’s options expiration window, leading to much more conducive flows for high-beta tech stocks, at least in the short term.