Nvidia had its AI moment and the stock went bananas. Wall Street frantically raises valuations, leaving investors to wonder if the stock is too expensive, too cheap, or a good value. It’s hard to know what to do with stocks now. Stock charts are as good a place as any to start to find out.
Looking at stock charts, or technical analysis, is one of the tools in an investor’s or trader’s toolbox. Charts can tell a story about feelings and when they are elated or very miserable.
In the case of Nvidia (stock ticker: NVDA), the euphoria is building. As trading begins on Wednesday, shares are up nearly 30% over the past five days. Nvidia has been responsible for more than its fair share of
Nasdaq Composite
3% gain over the same period. Nvidia, of course, is not
Dow Jones Industrial Average
component which decreased by 0.5%.
It is easy to determine why morale has improved. Nvidia for investors on May 24 The AI-related business was booming. Sales for the second quarter of the fiscal year are expected to be approximately $11 billion. Wall Street was expecting roughly $7 billion.
And after May 24, analysts moved sales estimates for 2024 to about $51 billion, up from $37 billion. Earnings per share estimates for 2024 are close to $10 from less than $6.
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It was all too much for investors to take in. The good news is that they may have time to catch their breath. Shares were down about 2.5% in morning trading on Wednesday and the stock appears to be in overbought territory.
“Way” isn’t really a technical term, but Nvidia’s Relative Strength Index, or RSI, is around 85. The RSI can, basically, fluctuate between zero and 100. A high number means the stock has been going up a lot, quickly. In other words, a lot of good news is reflected in stocks. A reading above 70 is usually considered overbought, which could mean that stocks are about to stall.
On Tuesday it was probably high [a] Rick Binsignor, founder of The Binsignor Group and former chief market strategist at Morgan Stanley, wrote in a research note on Wednesday, noting that “Elliott waves,” another technical indicator, is pointing to a $415 top in the stock right now.
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Elliott waves look a bit like mountain peaks and valleys, like using nature to predict the natural price movements of stocks. They may look mysterious, but when the arrow turns into a parabola, it leaves everyone struggling for answers. The waves could suggest that the stock could return to $350 while things calm down.
Market technician Katie Stockton, also founder of Fairlead Strategies, sees some support around $366 a share.
“So, no, I’m not now an Nvidia buyer,” Bensignor added. “And frankly, I have no problem selling covered calls in them or even reducing direct long exposure.”
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Covered call option strategy Where an investor who owns a stock sells a call option (the right to buy that stock at a fixed price) to another investor. Selling covered calls takes advantage of price volatility and generates some income for the investor. The risk is that the stock is trading above the strike price of the call option and the call seller loses that upside, giving up some of the profit on their original position.
Bensignor isn’t making a fundamental call or predicting where artificial intelligence could take Nvidia’s sales in the future. Selling a little bit when stocks are rising too quickly is generally a good idea. The amount to sell really depends on the type of investor. Dealers will sell more. Long term investors will sell less.
Write to Al Root at allen.root@dowjones.com
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