Momentum investors have abandoned common sense and gone mad over a new announcement in the world of video games.
Alphabet’s Google GOOG, GOOG has announced a cloud-based gaming service called Stadia. Stadia is meant to be the Netflix NFLX of gaming. Gamers will be able to stream complex games to their screens without needing consoles or high-powered graphic chips in their computers.
Let’s explore how the momentum crowd is viewing Advanced Micro Devices AMD incorrectly.
Please click here for an annotated chart of AMD. Please note the following:
• The chart shows there is a strong move in AMD’s stock on the announcement that Stadia will use a custom AMD chip.
• The announcement should not have been a surprise to anyone who carefully studies the gaming space. AMD chips have been used in consoles from Microsoft MSFT and Sony SNE.
• The chart shows that AMD’s stock broke out.
• Algorithms at The Arora Report show that a big part of the rise has been due to a short squeeze. In a short squeeze, short sellers panic and buy to cover their positions. This creates artificial demand for the stock.
• There are not many things that I know with certainty about the markets. You may be familiar with Arora’s Second Law of Investing: No one knows with certainty what is going to happen next. However, I do know with certainty that all short squeezes ultimately end. When a short squeeze ends, the stock falls. The process always creates a lot of bag holders in the momentum crowd.
• The chart shows the resistance zone. This means that the stock can go up a lot from here.
• The chart also shows two support zones.
• The chart shows that RSI (relative strength index) is overbought but the stock has room to run.
• The chart shows that the breakout has occurred on high volume. This is a big positive.
Technical analysis conclusion
Based on the foregoing, from traditional technical analysis, the conclusion is that this is a picture-perfect setup to back up the truck and buy AMD’s stock. Such a view may be reinforced by the following two factors:
• The short squeeze has barely started and can go on for a while.
• This market is controlled by the momentum crowd. The “momo” crowd can run up a stock much higher than can be justified based on fundamentals….Read more at MarketWatch.
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