In this report we take a look at AMD, MRVL, LRCX, QCOM, NVDA

Please note the glossary of terms and techniques here and herehere and here

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In 2019, cloud was the best performing sector before it began to show weakness in July. Cloud stocks led the market out of the December 2018 selloff, providing sizable outperformance for just over seven months in the first part of the year. Then, with no exogenous catalyst, a rotation began out of cloud/SaaS names and into underperforming value names.

This rotation saw the average cloud stock drop around 35-40%. Mega cap names in this space that were not pure plays, like Microsoft and Salesforce, stayed flat during this rotation. However, pure plays, such as Zoom and Twilio, saw drawdowns greater than 40%, while other names, like Crowdstrike and Zscaler, saw drawdowns greater than 50%. The value rotation, as it was called in 2019, took about three months to bottom. During this three month span, the S&P 500 gained about 2%.

Last week, on August 5th, the market began a new rotation out of cloud stocks and into value oriented sectors. Since the rotation began, the average cloud stock is down approximately 8-10%, while financials are up 3.5%, industrials are up 5.8% and transports are up 6.5%. Just like in 2019, this rotation is hardly noticeable in the broad market, with the NASDAQ100 being up 0.3% and the S&P 500 being up 1.4% over the same period.

No one knows how this year’s rotation will play out – whether it will bottom this Monday or be as deep as the rotation in 2019. Regardless, the cloud microtrend still has a few years to play out, so, if this rotation continues to deeper levels, we view it as a buying opportunity regardless of the prevailing sentiment at the time.

However, instead of focusing on the popular stocks that are taking a breather, I’d like to focus on a theme we began working towards prior to this rotation: semiconductors.

The two cloud ETFs, SKYY and CLOU, are a reasonable gauge for the cloud sub-sector. The ETF, SKYY, has an overweight to mega cap names like Amazon, Microsoft and Alibaba, while CLOU is focused on the small to medium sized pure plays, like Twilio, Zoom and Zscaler. Since the market bottomed on March 23 and began a new uptrend this year, the top performing sub-sector within tech is semiconductors.

Furthermore, if we look at our active portfolio, we can see being diversified by including semiconductors, as well as chainlink and bitcoin, has put us in a relatively stronger position than if we were solely focused on the momentum cloud names.

The above graph is our active portfolio, broken down into sub-sectors of tech. Most importantly, we show the current moving average that each position is testing. We currently have seven positions above their 8-day moving average in green – 1 in cloud, 2 cryptos, and 4 semis.

Furthermore, you’ll notice that we have five positions testing their 55-day moving average in red are all cloud names, with one semi. The vast majority of cloud names are testing their 55-day moving average right now. This is evident by the two cloud ETFs, SKYY and CLOU, which are both below their 20-day moving averages and testing the upper bounds of their 55-day moving averages.

In this report, we will focus on the sector that is not only holding up, but showing unnoticed strength behind the noise in the market. Semiconductors will likely never be as buzzworthy because you can’t directly use the products, like you can with Zoom, Netflix, and Shopify. They are also much more complicated to understand, which is why so few analysts cover them relative to other areas of tech.

However, as Beth has laid out over the last two years, semis will likely be the primary beneficiary of the upcoming microtrends in 5G and AI. For this reason, we have been positioning for this transition when very few were talking about it because of the cloud frenzy between April-June.

Immediate Setups

Advanced Micro Device (AMD)

SummarySummary

• If price falls into the $73-$70 range, we will look to buy.
• If price breaks out above the $88-$91 price range, we will also buy with tight stops.

So far, we guided three entries around AMD – two below the breakout zone at $48 and $55, and one on the retest of the breakout zone around $61. I believe the stock is setting up to provide another entry, which we will look to take today.

The Long-Term Trend (Weekly Chart)The Long-Term Trend (Weekly Chart)

Since bottoming in 2015, AMD has been in a strong uptrend, returning over 5000% from its low at $1.61. Even after such impressive gains, according to Beth’s fundamental theses (here and here), the future growth in AMD is something we want to continue participate in.

By analyzing the structure of uptrend in the weekly chart above, we can get an idea of the long-term trend in play from a technical perspective. For one, the trend appears to be healthy and is confirming Beth’s fundamental theses. Over a long-term timeframe, both the fundamentals and technicals are suggesting higher prices, which is always encouraging. However, over the short to intermediate term time frame, the technicals are seeing some apparent risk in AMD at current prices.

This is evident not only by the price failing to breakout of the $88-$91 price range, which is where an important cluster of prices is acting as resistance, but also by the internal momentum indicators. The MACD is at peak levels on the weekly chart, which usually accompanies a 3rd wave top, and on the daily chart that is discussed below, the MACD has already turned down. Also, notice the negative divergence on the MFI and RSI. This may take weeks to play out, but as long as this divergence is forming, there is risk of a correction.

The Setup (Daily Chart)The Setup (Daily Chart)

By looking at AMD on a shorter time frame, there appears to be 2 potential buying zones, if the price continues to show weakness.

The above chart is a close-up of the recent daily moves in AMD. Note the strength of the uptrend after breaking out of the $58-$59 resistance region – the price went nearly parabolic, with two large gaps in the chart.

After such a move, it is not uncommon for the stock to correct before the next leg higher. With the divergences in the weekly chart, which we just pointed out, coupled with the MACD rolling over in the daily chart above, it appears that AMD is setting up for one more leg lower.

If this is the case, there are two forces at play that should create strong support between the $73-$70 region:

Gaps – Gaps are powerful forces in technical analysis. Once a gap is made, it is likely that it will be filled in the future. In short, these are areas of intense buying/selling. I’ve outlined the two gaps in blue with the prices on the right.

Symmetry – Corrections typically unfold in three legs. The length of the 3rd and final leg is usually the length of the first leg down. The first leg down for AMD fell – 12.8%. If we track – 12.8% from the top of the most recent top, or the beginning of a potential 3rd leg down, it falls right in the middle of the first gap at $73.25.

We want to be fully allocated to AMD sooner rather than later. Therefore, if AMD falls between $73-$70, I will add. If AMD falls to the lower gap at $64-$62, I will also look to add. Also, if price pushes higher, never touching the $73 target, and instead breaks out above the $90-$91 region, I will look to add.

Marvell (MRVL)

Summary

• If price falls at or below the $33 in the current correction, we will look to buy.
• If the correction is over and price instead breaks out above $38 on elevated volume, we will look to buy.

Since bottoming in March, Marvell has been in, what appears to be, the middle of a standard 5-wave uptrend to all new highs. One of the key tells is that the 3rd wave in this pattern has topped exactly at the price extension we most commonly see 3rd waves top. For MRVL, this level is the $38 resistance.

Since Marvell topped  at this region, it has been in a standard 3-wave correction, as shown by the blue letters. Like with AMD, we can use symmetry to help gauge a buying zone. For the first leg down in MRVL, price dropped -13% from the all time high. After the bounce, price then began another decline, stopping just short of another -13% drop and just above the $33.

Also, note the internal signals, as well. We are seeig positive divergence on the A/D line as well as the MFI. Also, we have a positive RSI reversal pattern, where the RSI makes a lower low and price makes a higher high. This is a rare signal that suggests the uptrend will likely continue.

With so many buying signals in the internals, there is a good chance that the correction for MRVL is either over, or will catch a nice bounce. If Marvell trades into the $33 region (or close to it), I will add to our positon. Also, if price continues higher from here, we will look into adding on the breakout above $38. Either way, we are looking to add to our position in Marvell.

Lam Research (LRCX)

SummarySummary

• If the price continues to correct into the $355-$337 price range, we will look to buy.$355-$337 price range, we will look to buy.
• We will not buy if price breaks out above the $388.50 resistance.

Like Marvell, Lam Research has provided what appears to be a standard 5-wave uptrend off the March lows, as outlined by the red count on the chart above. Also, like MRVL, Lam Research recently stalled at the exact extension where 3rd waves typically end, which for LRCX is the $388.50 resistence.

Also, with the CCI and MFI showing strong signs of negative divergence, it is likely that LRCX further corrects before completing the 5-wave pattern to new highs. The most likely regions of support for a 4th wave, which also coincides with the 55-day EMA in red and a number of important price clusters, is between the $355 and $337 region. This will be the region I will look to add to our position

Adversely, if LAM does find the momentum to break to new highs above $388.50, then its 3rd wave can extend further. We will likely wait for a pullback to add to this position if the breakout scenario does happen.

Waiting for a Setup

Qualcomm (QCOM)

Summary

• There is no immediate buy setup I’m seeing at current prices.
• The charts are suggesting the QCOM is likely to correct soon, which we will use to add to our position.

If you haven’t read Beth’s recent analysis on Qualcomm, you can do so here. We recently bought a new position for our long-term portfolio on the breakout above the $93-$100 resistance zone that has kept Qualcomm bottled up for two decades.

Like Microsoft, Qualcomm has over two decades of price data to analyze. With that comes multiple trends on very large timescales at play. With that in mind, we will focus on the trend that is governing the short to intermediate timeframe, which is outlined in the chart below.

The above uptrend started in early 2016, which is around the same time that AMD began the long-term trend that we point out above. If we compare the structure of Qualcomm’s trend to AMD, you should notice a stark difference. Note the very choppy/overlapping pattern in Qualcomm compared to AMD’s near parabolic trend that has very little overlap.

With QCOM, even though the pattern is choppy, it has technically been in an uptrend, making a series of higher highs and lower lows. The structure appears to be a large degree leading diagonal pattern, which is a series of 5 overlapping waves that usually tracks a trendline. When the 5th wave in the structure completes, we usually see a correction.

Keep in mind, this is over the short to intermediate time-frame. Regarding the long-term trend, once again, the fundamentals and technicals are lining up. Technically, this large degree leading diagonal is likely the first wave in a large 5-wave uptrend. That being said, the next correction will likely be a fantastic buying opportunity.

What makes me cautious on adding at current levels and instead waiting for a pullback is:

• Qualcomm is stalling at the $114-$116 price region, which is an important zone to clear if QCOM will resume its uptrend.
• The price has an established 5-waves where the 5th wave is at the upper boundary of the trend channel.
• The MFI is at an extreme overbought condition, while showing slight negative divergence.
• The CCI and Accumulation/Distribution line are also diverging from price, suggesting weakness.

If we do get a drawdown, the likely target for retrace will be a retest of the breakout zone between $93-$100. Coincidentally, this area lines up with two important retrace levels. If price does pullback to this region, we will add to QCOM in our long-term portfolio. However, if the current uptrend decides to breakout to new highs – above $114-$116, we will continue to buy into the strength with tight stops to protect us. But for now, we will remain patient for the next setup.

Nvidia (NVDA)

SummarySummary

• With a long-term timeframe, we are not conservative with adding to our position in Nvidia, taking every buying setup that forms.
• There is no clear buy setup right now in Nvidia.
• Nvidia is showing considerable strength going into earnings this week, while at all-time highs, and trading above its 8-day EMA.
• However, the weekly chart, which tracks the long-term trend, is suggesting Nvidia could see a pullback in the short to intermediate timeframe, which, if happens, we will use to add to our position.

Nvidia is one of our favorite stories over the next 5+ years. As long-term investors, we are taking every setup we see in Nvidia. However, eventually, Nvidia will have to take a breather, which we will use to add to our position.

The above chart tracks the weekly moves in NVDA since it first started trading in 1999. Note the trend channel in gray. Rarely, do we see a stock successfully trading within, and respecting the boundaries of, a trend channel for so long. Notice the significant bottoms that occurred at the base of the channel, and also how price topped out when touching the top of the channel.

Today, Nvidia has successfully broken out of the upper boundaries of the channel, which is typically a very bullish sign. We added two new entries on this breakout for our long-term portfolio.

However, for anyone with a short to intermediate time frame, what gives me slight pause are the internal signals flashing. Note the negative divergence in the weekly CCI while the weekly MFI is at overbought conditions.

If you look back throughout the history of Nvidia’s price action, when you see these two patterns in unison on a weekly chart (marked by the horizontal red dotted lines), it always preceded a pullback of some degree. Some of these pullbacks were large and some were quite small, but it has been a solid indicator with Nvidia’s price action so far.

Keep in mind, the above chart is tracking the weekly moves in Nvidia. So, we could see higher levels from here before any pullback develops. We do not expect any weakness in Nvidia to be deep. Likely, we will get a retest of the upper trend channel. We will take any opportunity to add to this company.

Pullbacks are inevitable, and we will take any pullback from current prices as a gift with a long-term time frame in mind. In the meantime, we will keep tracking Nvidia for more break outs.