Nvidia is having an AI moment and the stock has gone bananas. Wall Street is frantically raising estimates, leaving investors wondering if the stock is too expensive, too cheap, or just rightly valued. It’s hard to know what to do with shares right now. Stock charts are as good a place to start figuring this out.
Looking at stock charts, or technical analysis, is a tool in an investor’s, or a trader’s, toolbox. Charts can tell a story about emotion and when it’s a little too euphoric or too miserable.
In the case of Nvidia (ticker: NVDA), euphoria is building. As of Wednesday’s trading, shares were up nearly 30% over the past five days. Nvidia is responsible for more than its fair share of
Nasdaq Composite’s
3% gain over the same span. Nvidia, of course, is not a
Dow Jones Industrial Average
component, which decreased to 0.5%.
The reason for the improvement in feelings is easy to identify. Nvidia told investors May 24 that AI-related business is booming. Fiscal second quarter sales are expected to be around $11 billion. Wall Street expected closer to $7 billion.
And after May 24, analysts moved calendar year 2024 sales estimates to about $51 billion, up from $37 billion. Earnings-per-share estimates for 2024 are approaching $10 from less than $6.
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All of this is too much for investors to digest. The good news is that they probably have time to catch their breath. Shares were down about 2.5% in morning trading on Wednesday and the stock appears overbought.
“Road” isn’t really a technical term, but Nvidia’s relative strength index, or RSI, is around 85. The RSI can, essentially, fluctuate between zero and 100. A high number means the stock is rising big, fast. In other words, there is a lot of good news to be found in the shares. A reading above 70 is generally considered overbought, which may mean the shares should be paused.
The “high is possible [a] peak, at least for some time going forward,” wrote Rick Bensignor, founder of The Bensignor Group and former Morgan Stanley chief market strategist, in a research note on Wednesday, pointing out that “Elliot waves,” another technical indicator , refers to $415 being a top in the stock at the moment.
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Elliot waves are a bit like mountain peaks and valleys, much like using nature to predict the natural price movements of stocks. They may seem vague, but when a stock goes parabolic, it leaves everyone scrambling for answers. The waves may suggest that the stock may travel back to $350 as things cool down.
Market technician Katie Stockton, who is also the founder of Fairlead Strategies, sees some support around $366 per share.
“So, no, I’m not currently an Nvidia buyer,” Bensignor added. “And frankly, I have no issue selling covered calls here or even shorting some outright long exposures.”
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A covered call option is a 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 a covered call takes advantage of price volatility and generates a small profit for the investor. The risk is that the stock trades above the call option strike price and the seller of the call loses on that upside, forgoing some profit on their original position.
Bensignor isn’t making a fundamental call or predicting where AI might take Nvidia’s sales in the future. Selling short when stocks rise quickly is a good idea, generally. How much to sell really depends on the type of investor. Merchants will sell. Investors here for the long term will sell less.
Write to Al Root at allen.root@dowjones.com
