Shares of Nvidia Corporation (NASDAQ:NVDA) dropped last Friday following the company’s latest financial results. NVDA stock, which was one of the hottest stocks of 2016, declined following results in what I deem a classic “pop-and-drop” move.
When bullishness reaches extremes in any given stock, index, commodity or currency, an inevitable period of consolidation (if not an outright correction) sets in. While it is too early to tell which will be the case for NVDA stock at this juncture, following last Friday’s post-earnings move, active investors and traders would be wise to respect both sides.
On Thursday, Feb. 9, Nvidia reported fourth-quarter earnings of $1.13 per share on revenues of $2.17 billion. Impressively, sales were higher by 55% year-over-year and higher by 8% sequentially. These numbers were great by just about any measure, yet analyst expectations of future results had also risen sky-high.
When the going gets too good, investors inevitably exhaust their buying efforts — and upside becomes limited.
NVDA Stock Charts
Before looking closer at last Friday’s pop-and-drop in Nvidia shares, let’s first gain some perspective from the multiyear weekly chart.
Here we clearly see the stock’s near-vertical ascent in 2016, which has its MACD momentum oscillator at the bottom of the chart dramatically overbought.
To clarify, just because a momentum oscillator is “overbought” does not mean a stock can’t continue to move higher. In fact, one could have made the “overbought” argument through this lens for most of the second half of last year. And look at what happened.
NVDA stock continues to trend higher, but last December, a red exhaustion candle appeared on the weekly chart. The stock then paused for a few weeks but began to rally again over the past three weeks. Last Friday’s pop-and-drop move left another bearish candle behind on the weekly chart right around the same spot as the December highs (near the $120 mark).
On the daily chart, we see that Nvidia stock rose steadily over the past couple of weeks (nearly 20%) as investors and traders bid up the stock ahead of its earnings report.
Through the lens of investor psychology, I would argue that this resembled late-comer traders who wanted to possibly profit from another post-earnings rally.
On Friday, NVDA managed to stay in the green for a paltry 20 minutes after the earnings report, but enthusiasm was quickly greeted with sellers. After it was all said and done, Nivida shares closed about 2.4% lower on the day, cleanly rejecting the highs from last December.
Less risk-averse traders could now try to play NVDA stock from the short side using last Friday’s intraday highs and an initial profit target near $105.
Alternatively, traders could either wait for another follow-through selling day to initiate small short positions. Option traders may want to sell out-of-the-money call spreads for some income.
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