I haven’t been trading at all for the past month or so, mostly because I simply haven’t spotted any setups that were remotely favorable. I know my style and it’s not chasing MOMO stocks or very short-term smallish movements. I tend to try to spot longer term trend changes, mostly tops that will begin lengthy or significant downtrends. Obviously given the current market trends it has been difficult to be overly bearish, so I’ve found myself in a sort of purgatory where I don’t want to chase anything on the long side, but am afraid to go short.

That changed today when I finally spotted a setup that fit my criteria. Now I just entered a very small trade today to test it out, so I have no idea if it will prove to be profitable or not, but I did want to take the time to explain the setup and why I found it to be favorable.

The stock in question is AMD. For many months, AMD has been a major public favorite and the move in it has not disappointed, having more than doubled in less than a year. This is a stock that I view as highly speculative because most who offer fundamental analysis have little actual understanding of the chip space and parrot the obvious bullish factors that everyone has known for many months. Last week, it broke up towards $100 and it looked as if it was on the verge of a massive breakout. But then it quickly reversed lower towards $95. Then earlier this week, news broke that Intel was going to replace its CEO. This caused Intel stock to immediately rip higher, and AMD to drop significantly.

The immediate, obvious reaction from the bulls was that it was stupid to sell AMD given that Intel was years behind and even if the new CEO was effective it would take years to turn the company around. Now, for what it’s worth, I actually agree with this. I think Intel has major, systemic problems that are going to be close to impossible to fix. But what I think doesn’t matter. While I’m long-term bearish on Intel, and I know that just a couple of years ago I would have fallen for this setup and quickly stepped in to buy up AMD on the dip, I now believe that you really have to carefully consider the opposite side of the trade and not immediately assume that your counter-party is a complete ignoramus who doesn’t have access to the same information you do. Of course they do. They have better information than you do. So then you must consider, in spite of all this, why are they selling? Or why aren’t more people buying? There must be a reason.

Over the past day or two, while AMD stock has continued to dip lower, the bulls have continued to confidently cite this price action as a major buying opportunity. It’s important to remember that sometimes stretched stocks are looking for a reason to sell off and don’t need a great one, any will do to disrupt the upward trend. I think that could be where AMD is. Most of the market is extremely bullish on it which makes the risk/reward to going long given the failed breakout and now continued weakness pretty bad, IMO, which makes the short setup pretty compelling.

As I continue to say, some of the best selloff catalysts are wolves in sheep’s clothing.