Some investors are gearing up for a “fourth wave” in Nvidia Corporation (NASDAQ:NVDA). But on the NVDA stock chart, this strategist is more concerned with the latest wave of buyers and their near-term impact on share price. Let me explain.
To say the least it’s been a nice ride in a very friendly trend for NVDA stock for bulls. Shares are up 35% year-to-date and about 400% since the start of 2016. And many see little reason for the fun to end anytime soon for the specialized semiconductor outfit.
Most recently, Jeffries & Co. analyst Mark Lipacis reiterated his “buy” recommendation on NVDA this past Monday.
The new research note enthusiastically predicts a “fourth wave” in computing tied to trends in machine learning and artificial intelligence. And in his estimation, Nvidia, along with peers Advanced Micro Devices, Inc. (NASDAQ:AMD), Cavium Inc (NASDAQ:CAVM) and Xilinx, Inc. (NASDAQ:XLNX), should prove longer-term beneficiaries.
I can’t say I’m entirely in disagreement with Jeffries & Co.’s optimism. My own most recent note on NVDA stock discussed just those sort of bullish trends and which appear to offer secular growth opportunities for a very well-positioned Nvidia.
On the other hand, with the latest wave of obviously anxious buyers showing up on the NVDA stock price chart, it bears repeating that other less-friendly market dynamics might come into play sooner and offer today’s interested buyers better opportunities tomorrow.
NVDA Stock Daily Chart
It’s true our view at the time was shares of Nvidia were in stronger position for a continued corrective move within the existing uptrend.
At the same time, though, in appreciating some trends like the one in NVDA have a tendency to last longer than we might believe possible, our proffered strategy was a modified long delta, “either or” combination.
Given the magnitude of the rally and wave of aggressive buying over this period, the belief in a friendly trend continuing unimpeded without a more meaningful corrective move is elevated. As well, a potential double-top formation with overbought stochastics backs up this strategist’s heightened concern at this juncture.
Playing NVDA Stock
Last time, our view was that a larger corrective pullback would be a healthy and welcome event in NVDA as it was pulling back on the price chart.
But I also didn’t want to be left on the sidelines if a friendly trend failed to allow for an actual price decline in line with our expectations.
Bearing that in mind, the modified bullish fence shown above was a nice fit for the situation. The combination sold a Sept $125/$120 put spread and purchased the Sept $165/$170 call spread. The play has gone on to expand from 20 cents to $1.70 for an open profit of $1.50 per spread.
I’d like to steal a page from our playbook last time, but designing this type position isn’t nearly as attractive given the rally.
And with earnings a couple weeks out, it only reinforces our opinion of needing to wait for a pullback in NVDA stock before giving the strategy or its embedded verticals more serious consideration.
Investment accounts under Christopher Tyler’s management currently own positions in Advanced Micro Devices stock and its derivatives, but no other securities mentioned in this article. The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT and StockTwits.