Shares of semiconductor company Nvidia Corporation (NASDAQ:NVDA) are higher by about 106% year-to-date and are thus a very bright spot in an otherwise slow-growing bigger-picture economic environment. Nvidia is scheduled to report its latest quarterly results next week on Nov. 10. Regardless of how NVDA stock reacts to those earnings, new trading setups are likely to emerge.
Here’s what I’m looking for.
An interesting phenomena in the stock market is that the more any given stock climbs, the more it tends to get the media’s attention. In turn, that means the stock comes on the public’s radar as something they must chase higher and buy at all cost. It’s funny: The average consumer goes to the grocery store and looks for deals, being careful not to overspend. Yet in the stock market — particularly if a sexy stock is ramping vertical higher — those frugal tendencies go out the window and the consumer buys at all costs.
Have you ever done this? Over my past 20 years as a trader, I’ve observed that in 100% of circumstances where a cult stock gets chased to the moon, it ends up in blood and tears for many of the investors who blindly buy. And I believe NVDA stock currently qualifies as such a case.
To be clear, I believe in the longer-term growth prospects of Nvidia, but 2016’s rate of change is not sustainable.
NVDA Stock Charts
The multiyear weekly stock chart displays one serious moon-shot this year, the magnitude of which is staggering. Even if Nvidia stock near $70 is “fairly valued” from a fundamental, shares’ rate of change this year is still concerning.
Note that the weekly MACD oscillator at the bottom of the chart is explosively high. Also note how far above even its red 200-week simple moving average the stock currently trades.
Ultimately, I see a high probability of a 10% to 30% mean-reversion move lower before we see a better buying opportunity.
On the daily chart, we see that despite the steepness of the 2016 incline in NVDA stock, the ascent has been orderly, and for the most part has held above its yellow 50-day simple moving average. We can also draw a simple uptrending channel as I did using the pink-dotted parallels. On this chart, we can see how far Nvidia is trading above its red 200-day SMA (~30%).
Given these overbought readings, here is my game plan following next week’s earnings report on Nov. 10:
- Should NVDA stock gap higher after earnings, I would look to fade said rally. Any move toward $80 I would consider as yet another blow-off rally and would use the opportunity to sell out-of-the-money call spreads against the stock. If and when the stock then starts to back off an initial post-earnings spike, I would also look to buy some puts, put spreads or even short the stock in small size for a mean-reversion move back toward $70 or lower.
- If Nvidia stock drops after earnings — and depending on how severe the selling is — I would look to jump on the trade and short NVDA stock or buy puts or put spreads for a better mean-reversion move lower in to the $55 to $60 area.
Ultimately, however, I would look to buy NVDA stock once again upon a significant enough bullish reversal.
But at this point, Nvidia first must consolidate for higher-probability trades on the long side to set up.
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