Monday’s market meltdown shattered uptrends in every sector while sending shockwaves across all risk assets. Red-hot semiconductor Nvidia (NASDAQ:NVDA) stock succumbed to the selling pressure, sliding 3.59% on the day.
But – and here’s the key point – unlike most other tickers, NVDA stock stuck the landing at its 50-day moving average. And that makes it a compelling buy-the-dip opportunity for those willing to bet the recent selling is simply September seasonality messing with investors.
We’ll dig deeper into why Nvidia is one of the easier stocks to buy here momentarily. But first, let’s analyze just how nasty Monday’s session was for the broader market and why it warrants caution for chart followers. I could cite a dozen broken charts to illustrate just how widespread the damage was, but we’ll settle with using the S&P 500 ETF (NYSEARCA:SPY).
The SPY Spills and NVDA Stock Dips
At Monday’s lows, the SPY pullback officially reached -5% from the peak. It may not sound like much, but it’s the largest drawdown of 2021.
What’s more, it’s the furthest we’ve probed below the 50-day moving average in a year.
Trend-followers are understandably frightened by the magnitude of the decline because it officially broke the uptrend that’s been in place all year long. While it doesn’t guarantee lower prices, it certainly shifts the path of least resistance from higher to lower.
This wasn’t some bout of retail traders smashing the sell button either. Instead, institutions were distributing shares, leading to the second-largest trading session of the year. More than 166 million shares change hands.
Mercifully, buyers returned to deliver one heck of an intraday bounce to ease the pain into the closing bell. Follow-through is desperately needed, however, to invalidate the bearish trend reversal.
Chips Dip, But Not Too Much
There is no shortage of stock dips to shop. Seemingly everything is well off the highs, offering tasty discounts. In trying to wade through the myriad choices. I suggest favoring relative strength. Generally, those stocks that hold up the best while the market is getting bloodied lead on the way back up.
With that in mind, take a look at how the Semiconductor ETF (NASDAQ:SMH) fared. In a sea of ETFs that cracked support, SMH is one of the few that held above the 50-day moving average.
And that should make it much easier for semiconductor stocks to make a comeback. It also says something about bulls’ willingness to defend their turf and keep the intermediate uptrend in SMH alive.
Both reasons make me more interested in finding a quality setup in the industry to buy, which brings us to Nvidia.
NVDA Stock Chart
The price runup in anticipation of Nvidia’s four-for-one stock split was incredibly impressive. And, though we saw a slight bout of profit-taking when the event arrived, bulls kept the trend alive by gobbling up the dip – and everyone since. The last perfect swing setup was when NVDA broke out of its ascending triangle on Aug. 23. The $210 zone was a major resistance zone, and buyers swarmed once we took it out.
Fast forward to today, and NVDA is back at the scene of the breach. Only this time, we’re testing it from the topside. If the principle of polarity holds, the old ceiling should now act as a new floor. The fact that we’re also testing and so far holding above the 50-day moving average is further confirmation that bulls are in control.
One silver lining to Monday’s shellacking is the implied volatility bump that accompanied it. NVDA stock options now trade with an implied volatility rank of 51%, suggesting that premiums are pumped up and ready for selling.
So consider the following play if you’re comfortable wagering Nvidia prices will remain above $200 for the next month.
The Trade: Sell the October $200/$195 bull put spread for $1.10.
On the date of publication, Tyler Craig did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
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