AI stock performance varied in Q1 earnings. Several AI-related stocks experienced significant declines in their share prices after releasing earnings reports. Some notable examples include ASML, TSM, and SMCI.

Some investors interpret these declines as a potential indication that the AI sector may have reached its peak. However, others maintain a long-term bullish outlook on AI, viewing the recent downturn as a temporary pullback.

For those who see a future in the AI sector, what's the game plan? This article breaks down a simple way to pick stocks, spot potential trade opportunities, and how to manage risks.

How to pick AI stocks using the Investment Themes feature

To invest in AI, investors first need to identify sectors that benefit from AI.

These sectors can be categorized into upstream infrastructure construction and downstream hardware and software. The infrastructure includes AI chips, memory chips, and cloud computing facilities, among others.

How can investors find relevant concept stocks?

Investors can use the Investment Themes feature on moomoo to discover potential AI concept stocks. You can go to Markets > US > Investment Themes.

Within the Investment Themes section, there are many investment themes, with four related to AI: Artificial Intelligence (AI), Featured Semiconductor, ChatGPT, and Cloud Computing.

Taking Featured Semiconductor as an example, investors can find related concept stocks and sort them by market capitalization to identify leading companies.

In the Semiconductor Selection investment theme, the top five companies by market capitalization are NVIDIA (NVDA), Taiwan Semiconductor (TSM), Broadcom (AVGO), ASML Holding (ASML), and Advanced Micro Devices (AMD).

How do we seize buying opportunities during pullbacks?

Knowing when to enter the market amidst price pullbacks is crucial.

In technical analysis, there's a tool called Fibonacci retracement that helps determine potential pullback levels.

Named after the Fibonacci sequence, it includes a series of percentage retracement levels (such as 23.6%, 38.2%, and 61.8%). This tool aids investors in identifying potential resistance and support levels during a pullback.

How do you draw Fibonacci retracement lines? Let's take NVIDIA as an example.

On moomoo, you can find "Fib retracement" in the drawing tools.

First, identify the recent lows and highs of the stock's price trend, then connect the closing price peaks and troughs from the previous uptrend.

Let's look at the daily chart. NVIDIA's recent uptrend can be traced back to a low of $392 on October 31, 2023, and a high of $974 on March 8, 2024.

Generally speaking, 38.2% and 61.8% are considered the most important retracement levels. Therefore, investors can focus more on these two Fibonacci ratios as potential support levels.

Many Fibonacci followers believe that a breakout of the 61.8% level would be an indication that the price is likely to continue going down.

Images provided are not current and any securities are shown for illustrative purposes only and is not a recommendation.

Managing risk using the 7%-8% sell rule

Nobody can predict stock prices with 100% accuracy. Mistakes in identifying potential buying points can lead to significant losses. Hence, effective risk management is crucial.

One effective risk management method is setting stop-loss orders.

A straightforward strategy is the 7%-8% stop-loss strategy. As the name suggests, if the stock price falls 7%-8% from the purchase price, investors should consider selling the shares.

Looking at the NVIDIA example again, if an investor aims to purchase shares at the 61.8% retracement level, which is about $614.5, they could place a stop-loss order between $565 and $571.

Bottom line

The article presented a guide to choosing stocks based on Investment Themes and identifying purchase opportunities with technical analysis. It's also important to stay mindful of potential risks:

1. Ignoring company fundamentals could miss hidden dangers.

2. Depending exclusively on a single indicator may result in misreading market movements.

Balancing market trends, fundamentals, and technical indicators can help investors mitigate risks and make more informed decisions.