Shares of graphics processor manufacturer Nvidia Corporation (NASDAQ:NVDA) have rallied by a monstrous 85% off the February lows and 25% since its earnings report earlier this month. While NVDA stock clearly is in uptrending mode, the rate of this rally is simply unsustainable at this rate.
Instead, I suggest looking for opportunities to fade this rally in Nvidia stock for when it mean-reverts lower.
Nvidia Fundamentals
When Nvidia reported its latest quarterly results on May 12, the company beat on the top and bottom lines. Earnings jumped from 33 cents per share to 46 cents per share, and revenues improved by 13.4% to $1.305 billion. NVDA also jacked its revenue guidance for Q2 higher, to a range of $1.32 billion to $1.38 billion. Each one of these numbers beat the Street.
Nvidia’s products are in major demand given the dramatic shift over the years to more visual and graphics-heavy info displays, ranging from in-car displays/technology to video gaming and beyond.
NVDA Stock Charts
Like other obvious and believable single-stock growth stories out there, Nvidia is benefiting from investors who have to chase its shares higher out of sheer lack of other options in a low-growth, low-rate environment. However, this dynamic has pushed NVDA stock too high too quickly in recent weeks, and as we see in this chart, the slope has gone from steep to vertical.
Once a stock goes vertical, it can’t really accelerate its upside momentum any further, and gravity kicks in. For NVDA stock, this upside momentum is unsustainable, and that most likely will lead to a moderate consolidation phase.
On the daily chart, we see that the day following the earnings report on May 13, NVDA stock gapped higher, then it rose for eight straight days before taking a quick breather on Wednesday.
As a result of this manic squeeze, Nvidia stock now resides significantly above its moving averages, which has the stock’s MACD oscillator at its most overbought readings ever. The stock is even seriously extended above its near-term moving averages such as the yellow 21-day moving average.
Simply put, this rate of change can’t go on much longer, which means it’s a high-probability shot to take the other side of this rally, whether that’s by either shorting the stock, or buying cheap puts, put spreads or other bearish strategies.
NVDA stock should begin consolidating into the low $40s before it can take a better bullish stance.
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