Shares of Nvidia (NASDAQ:NVDA) have certainly rebounded off support at the $130 level. Nvidia stock rose over 20% for the month of June as chip stocks lead the charge higher. Some of the relief rally was warranted given the easing of tariff tensions and the previously oversold conditions. NVDA has come a little too far, too fast though. The red-hot run up in Nvidia is starting to cool.
Nvidia stock is getting pricey on a valuation basis. Its price-to-earnings is now back above 30, while price-to-sales is nearing 10 and well above the five-year average of 7.4. The latest earnings report was less than impressive with both revenue and guidance both disappointing.
Slowing growth, especially in the gaming sector, should provide a serious headwind for any additional multiple expansion.
NVDA stock is getting overbought from a technical perspective. Nvidia shares breached the 75 level on a nine-day RSI basis. MACD is also at the highest readings in nearly five months. Bollinger Percent B blew out past 1, another sign that the rally may be reaching a climax.
Nvidia stock is at a large premium to the 20-day moving average, which has been a relaible indication of a top in the past. There is major gap resistance between $170 and $185 on the chart.
Most importantly, NVDA stock traded up to nearly $174 yesterday before reversing course sharply and closing well off the highs at $166.17. This type of reversal pattern is many times emblematic of a short-term top in the stock. The buyers may finally be exhausted, especially given the magnitude of the rally.
In the previous article from May 22, my viewpoint was decidedly more bullish for NVDA, with the stock trading near the $150 level. The fundamentals and technicals both looked attractive at that time. I had an initial upside target of $171, which was hit today before Nvidia stock dropped significantly. The fundamentals and technicals both are looking stretched now, so my outlook has become more bearish … because price does matter.
Stock traders should look to short NVDA stock on any strength. My initial target will once again be the 20-day moving average, this time near the $150 level.
Option traders may look to take a defined risk bearish position by selling a out-of-the money bear call spread. Earnings are due Aug. 15, so selling the Aug 9 $180/$182.50 call spread for a 55 cents credit provides plenty of upside cushion, while also avoiding any earnings-related risk.
Tim may hold some of the aforementioned securities in one or more of his newsletters. Anyone interested in finding out more about Tim and his option-based strategies can go to https://marketfy.com/item/options-and-volatility.
