Buy Nvidia Stock as it Shakes off Market Meltdown

Monday’s meltdown started as a broad-based affair but quickly turned into a rout for small-caps. As the little guys careened lower, capital flooded into tech stocks, lifting the likes of Nvidia (NASDAQ:NVDA) higher by nearly 3%. The sudden burst of strength from NVDA stock and peers was a welcome change of pace from a sector that had been underperforming for the past two weeks.

A racecar featuring Drive PX 2 technology from Nvidia (NVDA) parked.
Source: Steve Lagreca / Shutterstock.com

Today we’re taking a fresh look at the Nasdaq Composite index and semiconductor industry. Then we’ll breakdown why I think Nvidia is a buy.

From Laggard to Leader

Tech is back, baby! Sure, it’s only one day’s worth of outperformance, but boy, was it nice to see the technology companies shed their weak ways and start making their way back to the top of the leaderboard. The muscle-flexing from tech was undoubtedly part of the reason Monday’s mess wasn’t far worse.

Nasdaq ETF (QQQ) chart showing bullish reversal candle
Click to Enlarge
Source: The thinkorswim® platform from TD Ameritrade

In my experience, stocks that hold up the best during a correction are often those that lead during the subsequent recovery. If this tendency holds this go-around, then semi stocks deserve to be on your radar.

NVDA Stock Charts

With the budding strength of the tech sector and the outperformance of semiconductors now established, the stage has been set for Nvidia’s entrance. While its sector and industry both cracked the 50-day moving average, NVDA stock did not. It didn’t even return to its prior pivot low. Though slight, its higher pivot low reflects its outperformance.

Nvidia (NVDA) stock chart showing support holding
Click to Enlarge
Source: The thinkorswim® platform from TD Ameritrade

The stock ended with quite the Marubozu candle on Monday. It opened at its low, traveled higher all session long, and closed at the high. It doesn’t get much more bullish than that. The resistance zone near $532 is the first upside target. Breaching it would signal the uptrend is back on track.

My bullish thesis is wrong under $467. If we take out that support zone, then buyers should re-assess. The lofty price tag on NVDA stock makes it a prime candidate for trading options spreads. You can either shoot for a higher probability of a modest return with a bull put, or go for a bigger return, but lower probability with a bull call.

Bull Call Trade: Buy the Nov $530/$550 bull call for $6.15.

You’re risking $6.16 for a potential return of $13.84. The probability of max profit is around 39%

Bull Put Trade: Sell the Oct $450/$440 bull put for $2.30.

You’re risking $7.70 to make $2.30. The probability of profit is 79%

On the date of publication, Tyler Craig held bearish options positions in QQQ.

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Article printed from InvestorPlace Media, https://investorplace.com/2020/09/buy-nvda-stock-as-it-shakes-off-market-meltdown/.

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