Stock Market

AMD’s False Breakout above Short-Term Trendline for NASDAQ:AMD by SquishTrade

Primary Chart: Down Trendline from November 2021 to Present and Several Anchored VWAPs

Recent False Breakout above Short-Term Trendline

After hitting a new low on September 29, 2022, AMD had a brief a rally off the lows. This led to a brief break above a shorter down trendline from August 4, 2022 peaks (light blue down trendline) Now, AMD looks to have faked out the bulls and bottom pickers again. Before the close, AMD’s price sunk all the way back to the trendline, perhaps just below depending on how exactly it is drawn, after seeming to push decisively above it. After hours it sunk well below that trendline again with preliminary earnings results that were well under expectations.

Notice the daily candle from October 6, 2022. Some technicians call this a Pinocchio candle or bar. It has a long upper shadow that pushes above a key level, but the shadow being the only part of the candle above the key level by the close of the price bar.

For another example for purposes of comparison, consider AMC’s most recent short squeeze (which was smaller than many others in the series of short squeezes it has seen). Here, AMC formed a extremely large Pinocchio bar that effectively signaled the exhaustion and reversal that ensued. That one worked exactly as expected.

A Pinocchio price bar shows up when the bar breaks temporarily above a level of resistance and then falls back below it. It also can appear when the bar breaks temporarily below a key support level , and then reclaims that level by the close of the bar. Essentially, a Pinocchio bar is a failed breakdown or failed breakout that occurs within a single price bar.

Some basics of Pinocchio bars follow below for those unfamiliar with the term:

  • Martin Pring, a technical expert, writes that these bars “give a false sense of what is really going on.”
  • Pinocchio bars tend to create bull or bear traps depending on the direction the long upper shadow points.
  • Failed upside breakouts, such as the one shown here on AMD’s chart, lock in unwary bulls with a loss by the close of the bar.
  • Shorts similarly get stopped when intraday bars pierce well below support and then whipsaw back above that support by the close.
  • In Martin Pring’s technical-analysis reference books, he explains that the “false break” that develops is “indicative of exhaustion since the price cannot hold above the strong resistance reflected by the line .” In short, like the character Pinocchio’s nose that grows when he lies, the price move beyond the resistance / support ends up being a false move, and the bigger the false move, the bigger the lie.

Just because price is in a severe downtrend does not mean that prices can behave irrationally. How many sharp and powerful bear rallies have occurred so far in this market, especially in beaten down laggards?

For example, price could go down and retest the lows and then rally up to high $70s. Or it could make new lows, and then rally hard back up to a key Fibonacci level, such as the .382 or .618. Until price can start exceeding major swing highs and lows, and its down trendline, it’s not a great candidate for bull-trend trading or investing.

Additional Comments and Considerations

Not long ago, stocks like AMD and NVDA were some of the hottest technology stocks traded in the world. They had become veritable market leaders not just in their innovative technology products but also in price leadership. In terms of relative strength , AMD and NVDA both spent plenty of time at the forefront of one of the most powerful bull markets in history (funded by extra liquidity and easy-money policies of central banks) from 2020-2021. But then the cracks started to appear in what otherwise appeared to be some of the most formidable stocks on the planet. Major indices began to roll over not long afterwards.

AMD has not gone unscathed. Its downtrend is not difficult to see with the clearly demarcated lower highs and lower lows. On the Primary Chart, note the orange down trendline that has contained price since November 2021 peaks. VWAPs confirm the view. The dark blue VWAP is anchored to the all-time high from November 30, 2021. It’s hard to imagine that there was quite a lot of liquidity on that day, with a number of buyers paying that price at the very top, at $164.46. It can be a viable strategy to strategically buy stocks that have been hitting new 52-week highs showing extraordinary relative strength , but this time, buying at the all time high didn’t work out so well for some.

How many times have traders and investors started eagerly buying the dip in this bear? The chart tells the tale. Quite a few major swing lows, with candles having a nice long lower shadow, appear AMD’s YTD chart. Each rally may have made a nice trade for nimble countertrend traders, but for investors hoping they caught the low of a pullback, or even better a multi-year low, disappointment ensued.

AMD’s days of heroic market leadership along with NVDA continue to be a distant memory as continues to fall to new lows. Should anyone be a knife catcher and hope to have a multi-bagger in 10 years? That’s a question for your financial advisor or your own due diligence if you’re fundamentally oriented. But from a technical perspective, a lot has to change with regard to the structure before it’s safe to buy. Jesse Livermore had a fantastic adage that applies well to this situation, which was recently published by @InvestMate in an Editor’s Pick here on TV:

“Don’t take action with a trade until the market, itself, confirms your opinion. Being a little late in a trade is insurance that your opinion is correct. In other words, don’t be an impatient trader.”

Credit and thanks to @InvestMate for reminding everyone of these timeless truths to help in trading and understanding markets.

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