For a long time Amazon has been a favorite of the momo (momentum) crowd in this momentum-driven stock market.

Amazon AMZN, +2.49% had been consistently ranked No. 1 in money flows. Recently all the planets aligned for AMD AMD, +2.94% and AMD dethroned Amazon to become No. 1. The planetary alignment for AMD included troubles at competitor Intel INTC, +1.58% , a new product introduction, a technical breakout, a short squeeze and an analyst setting a $30 share-price target based on his information that many institutions were looking to take big positions in AMD.

Now there is a so-called shooting star getting in the way. Let us explore with the help of a chart.

Chart

Please click here for an annotated chart of AMD along with the technical analysis. Please note the following:

• The chart shows the formation of a shooting star, a reversal pattern. A shooting star is characterized by the open price, close price and low price of the day in proximity to each other along with a long upper shadow. In plain English, a long upper shadow means bulls ran up the stock a significant amount from the open but failed to hold the high and the stock closed near the open and the low.

• The shooting star formation in the case of AMD is a weak one because the smart money (professional investors) stopped selling near the close.

• The chart shows the major technical breakout for AMD.

• The chart shows when AMD dethroned Amazon and became No. 1-ranked based on the ZYX Change Method. Please see “AMD dethrones Amazon in investor money flows.”

• The chart shows that when the momo crowd was aggressively buying AMD stock, running it up over $27, the smart money started aggressively selling. The trigger for smart-money selling appeared to be the ending of this leg of the short squeeze and a bullish analyst’s call.

• Selling by the smart money and the ending of the short squeeze caused the stock to move down. The momo crowd continued to buy during the pullback but could not overcome the selling by the smart money.

• The chart shows that the relative strength index (RSI) is very overbought and the momentum is waning. This makes the stock vulnerable to a short-term pullback.

• The chart shows that the shooting star was formed on very heavy volume. This is considered bearish.

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$30 magnet

A target price of $30 is acting as a magnet for the momo crowd. If the overall market weren’t so bullish and momentum-driven, there would have been a high probability of AMD giving up about one-half to two-thirds of its recent gains. Subscribers to The Arora Report are provided a precise buy zone.

A positive source of buying for AMD may come from analysts’ upgrades. Even though the stock has performed well, many analysts are still not on board. If analysts give up their bearishness, their followers will buy, pushing the stock higher.

Semiconductor sector

The beauty of this market has been the rolling corrections. While individual sectors get hit, money rotates into other sectors, pushing the indexes such as Dow Jones Industrial Average DJIA, +1.33% , S&P 500 SPX, +1.59% , Nasdaq 100 NDX, +2.33% and small-caps IWM, +1.62% higher. Moreover, the momo crowd has not relented. If the momo crowd starts feeling some pain and analysts’ upgrades do not come through quickly, a sharper pullback may happen.

Lately the semiconductor sector, represented by ETFs SMH, +1.16% and SOXX, +1.37% , have undergone a correction. Now popular stocks such as Micron MU, -0.66% , Applied Materials AMAT, +0.76% and Lam Research LRCX, +0.94% are showing signs of stabilization and potentially getting ready to move up. This is helpful for AMD to move up. Further, AMD’s main competitor in graphic chips, Nvidia NVDA, +4.25% , keeps moving up.

It is important to know Arora’s Second Law of Investing: “No one knows with certainty what is going to happen next. The best that investors can do is to make decisions based on probabilities.” Probabilities favor a short-term pullback and then another attempt to push higher. Aggressive investors may consider scaling in the buy zone. The risk-reward is not favorable if you’re buying near the highs at this time. If the stock continues to run, there will be many opportunities to buy when the risk-reward ratio is more favorable. Risk-reward is not cast in stone and changes.

10-bagger

The probability of AMD becoming a “10 bagger” — a stock increase of 10-fold — like Nvidia is small but should not be ignored.

Disclosure: Subscribers to The Arora Report may have positions in the securities mentioned in this article. Nigam Arora is an investor, engineer and nuclear physicist by background who has founded two Inc. 500 fastest-growing companies. He is the founder of The Arora Report, which publishes four newsletters. Nigam can be reached at Nigam@TheAroraReport.com.