Nvidia (NASDAQ:NVDA) continued its drumbeat of daily records this week. The relentless ascent in NVDA stock has been fueled by an extremely bullish backdrop in the broader tech sector and the semiconductor industry.
Altogether, their charts tell tales of trend continuation and momentum feedback loops. Investors second-guessing the goodness due to economic worries or valuation concerns have entirely missed out on the NVDA stock run.
To celebrate the record-shattering week, I want to break down the boom in tech and identify the best ways to trade Nvidia now.
We don’t live in a world where individual stocks rise and fall on their own merits alone. They are, to one degree or another, influenced by the undercurrent of broad market trends and sector shifts. A good company in an out-of-favor sector gets penalized. Its wings are clipped by soured sentiment, limiting its ability to fly. Alternatively, a weak company in a favored sector receives a tailwind. It’s not a blessing born of good behavior. It’s a byproduct of being in the right place at the right time.
This reality is why traders should always keep an eye on the tone and trends of the S&P 500, Nasdaq Composite and other major indices.
The same goes for keeping tabs on sector performance. Knowing what is leading or lagging can be a huge time saver in discovering profitable opportunities as you explore the vast tundra of tickers.
The above explanation highlights the essence of top-down analysis. Moving from index to sector to stock allows for more informed decision-making and, ultimately, a higher success rate with your stock picking.
Enter NVDA Stock
The fast-growing company sits in the semiconductor industry of the technology sector. And both are on fire. With Thursday marking yet another record high, the Nasdaq Composite has now risen 67% off the March low. The epic magnitude of the rise has been matched by its consistency.
Dip buyers have been as reliable as a clock, emerging to buy every single dip to the rising 20-day moving average.
There is no denying mega-cap stocks like Apple (NASDAQ:AAPL) and Microsoft (NASDAQ:MSFT) have done the heavy lifting, but the semiconductor industry has also been a growth engine for tech. The VanEck Vectors Semiconductor ETF (NASDAQ:SMH) has risen 79% from the March bottom.
After Taiwan Semiconductor (NYSE:TSM), Nvidia is the second-largest holding. NVDA stock hasn’t been a backseat passenger during the now five-month trip. It has been driving the bus. Compared to the Nasdaq’s 67% gain, and the semiconductor industry’s rise of 79%, Nvidia has climbed 153% since March.
In conclusion, we have a leading stock in a leading industry in the leading sector. That’s about as bullish a combination as you’ll find in the field of technical analysis.
Beware the Asymmetric Risk vs. Reward
NVDA stock is working on its eighth up day in a row. Like all momentum feedback loops, it seems the higher the stock goes, the stronger it looks. But here’s where my inner risk radar starts going off. I’m not a fan of buying something that has already risen eight days in a row. The risk/reward ratio is out of whack, where the downside starts to outweigh the remaining upside. Tack on the looming earnings report on August 19 and buyers are running out of time if they want to enter and exit a trade before the next binary event strikes.
You have two choices.
First, sit on the sidelines and wait for a better setup to form. Nvidia has developed many pullbacks along the way after reaching short-term overbought conditions. There’s no reason we won’t see something similar this go around.
Second, if you want to jump on the momentum train and bet that the eight-day rally can extend itself to a ninth, tenth or eleventh session, then at least use a tight stop so when the inevitable retracement arrives you don’t ride it back down.
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