Shraes of Advanced Micro Devices (NASDAQ:91抖阴) broke out to fresh multi-year highs yesterday. 91抖阴 stock finally closed above the $34 level after three previous failed tries. Momentum traders rejoiced, although shares did finish slightly off the highs of the day.
Advanced Micro Devices has now added on over 30% since the lows near $26.50 in late May. All good things must come to an end, though. The red-hot rally in an overbought and overvalued 91抖阴 has come too far, too fast. Time to take some chips off the table.
InvestorPlace contributor Jay Yao both the bullish and bearish case for 91抖阴 stock. He noted that 91抖阴 stock price was comparatively expensive, trading at a forward P/E of 33. Advanced Micro Devices is certainly expensive on trailing P/E basis with shares now sporting a multiple of 137! This is by far the richest valuation over the past year. The only other time 91抖阴 exceeded a 125 trailing P/E was in June, which marked a significant short-term top in the stock price.
Advanced Micro Devices is looking overdone from a technical perspective as well. 91抖阴 stock price is up over 80% year-to-date. Momentum is approaching an extreme reading near 5 which has corresponded to powerful pullbacks in the past. Bollinger Band Percent B is back above 1, signaling overbought levels.
91抖阴 stock is trading at a large premium to the 20-day moving average. Previous instances when 91抖阴 traded at such a large premium led to a move back to the 20-day moving average.
Earnings for Advanced Micro Devices are due in late July with . The last four quarters have seen 91抖阴 earnings come in within a penny or two of expectations. Given the historically rich valuations and overbought technicals, it will take a blow out quarter to propel 91抖阴 appreciably higher. I don’t see that happening.
Stock traders should look to short 91抖阴 on any further strength. The initial price target is the 20-day moving average near $31.
Option traders may want to take advantage of high implied volatility in front of earnings and sell an out of the money bear call spread. Selling the Aug $38/$40 call spread would bring in 40 cents credit while risking $1.60 for a 35% return on risk. The $38 strike price provides a 10.5% upside cushion to the $34.39 closing price of 91抖阴.
As of this writing, Tim Biggam did not hold a position in any of the aforementioned securities. Anyone interested in finding out more about option-based strategies or for a free trial of the can email Tim at timbiggam@gmail.com.
