As we kicked off the second quarter of 2014 yesterday, the S&P 500 pushed to a fresh all-time high on a daily closing basis, and among the jumpers was our focus for today: semiconductor firm Nvidia (NVDA).
Yesterday’s rally did have plenty of risk-on characteristics, with cyclical sectors outperforming the defensive ones and continued sector and group rotation. On the other hand, while small-cap stocks outperformed large caps on the day, the recent relative underperformance of the former is increasingly becoming a reason for concern to yours truly.
But, let’s not let the bigger-picture view get in the way of making profitable trades on pure price action.
Case in point, on Tuesday, the semiconductor stocks saw a notable rally, which pushed the group to new 13-year highs. Among the stocks partaking was NVDA, which rallied 4% on the day in a technically significant move in the near and medium-term time frames.
Like a good number of its peers, NVDA stock showed good strength in 2013, which led to a crucial breakout past the diagonal multiyear resistance line in late 2013/early 2014. Many semiconductor stocks lost their luster after the dot-com bubble burst in the year 2000, but NVDA enjoyed a monster rally from 2004 into 2007, which ultimately led to an awful selloff during the financial crisis of 2008.
NVDA Stock Charts
Leading up to the 2013 breakout, NVDA stock as well as many of its peers such as Rambus (RMBS) began to act better again technically, allowing for more calculated trades for active investors and traders. Over the past few months, these stocks began acting even better technically. After a few weeks of consolidation, they once again look ripe with opportunity.
Well-defined risk is the cornerstone of a good trading setup, and NVDA currently offers just such an opportunity.
This brings us to the daily chart, where the favorable near-term risk/reward is more apparent to the eye. Note that after breaking out of its late 2013 consolidation pattern, NVDA stock jumped roughly 17% in a little more than one week’s time, which led to a relatively tight consolidation pattern within the stock currently still finds itself. The consolidation is taking place in time (sideways) as opposed to in price (lower), and that is the type of consolidation price action I like to see following a major multiyear breakout in a stock.
In other words, the current consolidation phase that is taking the shape of a so-called bull flag pattern is constructive and favors the odds of resolving to the upside sooner rather than later.
A break of NVDA stock past the $19 area on a daily closing basis could get the stock moving toward the $21 area as a next upside target. Personally, however, I am not interested in chasing this stock higher until it can prove itself above $19.
Or, in other words, I don’t want to anticipate the breakout, but rather go with it once it has taken place.
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Download Serge’s trading plan in the Essence of Swing Trading e-book here. As of this writing, he did not hold a position in any of the aforementioned securities.