A combination of technical setups help to propel AMD higher. When it hit the 200 MA, it bounce up and shot up to $122. This chart lesson might be a bit advanced for those who have not mastered some of the technical concepts here.
But do not worry, the main thing is for you to focus on the power of the 200 day moving average. You need to know from this example that when a stock drops to its 200 day moving average, you need to pay attention to it. Analyze as much as you can because there is a possibility that it can give you a nice gain in a short period of time.
If you did not know about this...
The 200 day moving average is very powerful and can stop a stock from dropping any further. In other words, you can often find trading opportunities when a stock trades down to its 200 day moving average.
In the chart above, AMD was correcting in July 2021. It hit the 200 MA on July 19 2021 and from there you can see how it rose rapidly to $122. All this action happened in 12 trading days. This does not happen that often in large cap stocks such as AMD. But now you know what can happen when a large cap stock hits the 200 MA.
Prior to that, the stock already entered into a condition that was suitable for bullish moves. The stock had a bullish cross back in June 2021. A bullish cross in my definition is a stock that has its 20 day moving average cross back above the 50 day moving average.
Nothing special about these 2 moving averages. I like to use these MAs and these 2 moving averages are watched by many traders. For example, the bollinger bands also consists of the 20 period moving average in the middle of the band. While the 50 MA is a medium term moving average that is watched by many institutional investors.
Here is a secret...
When a stock is trading between the 20 MA and the 50 MA it can often give us a very good trading opportunity.
Hold on.... not every stock that sits in between the 20 MA and 50 MA has that touch. You need to have the 20 MA and 50 MA "rising". They must be rising. If you take a look at the 20 MA and 50 MA in the chart above, you can see that they are both rising. And AMD's stock price was sitting in the middle of it.
AMD was in an oversold situation when it dropped to the 200 day moving average. You can gauge whether a stock is oversold by using a technical indicator. I like to use the stochastics. When it is below the 20 reading, this shows that the stock is oversold.
You do not need a stock to be oversold all the time when it hits the 200 MA but the presence of an oversold situation will add more confirmation to the trade. Many people will be looking at an oversold technical indicator. The more who notice the oversold situation the better it will be for the stock to bounce back up.
It is always a good idea to check the weekly charts for confirmation of whether the stock has a good chance of moving higher in the daily charts. The above chart is the weekly chart of AMD.
When AMD corrected to the daily 200 MA, it was also correcting to an area of support. There is price congestion on the left which acted as support. I have highlighted the area in green. If you are new to technical analysis, you might not know what support is.
Therefore, some knowledge of support and resistance will go a long way to help you gauge areas where a stock may rise or fall.
Not only was AMD dropping to the daily 200 MA support, it was also dropping to the weekly 50 MA support. This gives another layer of psychological support to the stock.
The MACD also issued a weekly buy signal. This is where the MACD lines cross and gives a buy signal. The MACD is watched by many traders and this no doubt will help to give the stock a bullish bias.
The buy signal happened sometime ago before the stock setup for the 200 day moving average support. So, that in itself put the stock on the watchlist of people who trade using MACD signals. Especially those who do medium term investments or trades since this is a weekly buy signal itself.
How do you know if the stock can shoot higher?
One of the answers to this question is the presence of a previous rapid rise. You can see that AMD had a nice up move from May to July 2021. This is a rapid rise.
AMD then corrected nicely to form a flag.
Typically, stocks tend to move higher when it breaks out of a bull flag pattern. The bull flag pattern is a bullish continuation pattern and they can offer some nice gains.
Another wonderful thing about the bull flag is that it can give you a target. You can take the previous height of move up which we call the "pole" and project it upwards from the base of the flag to get a target.
I have drawn the target in blue arrows and AMD has more than met its bull flag target.
For a more precise entry and exit, one can employ the usage of the 60 min chart.
The chart above shows the 60 min chart of AMD. Notice how AMD corrected to the rising 60 min 200 MA. If the 200 MA works in the daily chart, it can also work as a support in other time frames.
In fact, day traders respect the 200 MA in many many time frames.
As AMD dropped to the 200 MA, it also formed a 60 min ascending triangle. The ascending triangle can be a bullish reversal pattern and once the stock broke out of the pattern, it quickly rose higher.
Notice how the stock also had a bullish cross in the 60 min chart. The stock went above all 3 moving averages and it entered into a bull mode. A bull mode is where the 20 MA is above the 50 MA and both of them are above the 200 MA. This is the perfect condition for stocks to move higher.
As the stock moved higher, you will notice at some point it had a climactic volume. This is usually a warning sign. When a stock moves rapidly upwards and there is a climactic volume, it tells you that the non professionals or greedy ones will have heard the news and are excited about the stock.
The majority is always wrong at both ends. And this was a warning sign to sell the stock and book profits.
Hope this chart lesson have enlightened you and helped you to understand more about how rapid nice moves happen. And hopefully you will be able to spot these kind of opportunities in the future.
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