Nvidia had its AI moment and the stock erupted. Wall Street is frantically increasing its estimates, leaving investors wondering if the stock is overpriced, undervalued, or just right. It’s hard to know what to do with stocks right now. The stock charts are a good place to start to find out.
Looking at stock charts or technical analysis is a tool in an investor’s or trader’s toolbox. Charts can tell a story about the mood and whether it’s a bit too euphoric or too miserable.
In the case of Nvidia (Ticker: NVDA), the euphoria is increasing. At the start of Wednesday’s trading, shares are up nearly 30% over the past five days. Nvidia was responsible for more than its fair share of the Nasdaq Composite’s 3 percent gain over the same period. Nvidia, of course, isn’t included in the Dow Jones Industrial Average, which fell 0.5%.
The reason for the improvement in mood is easy to determine. Nvidia told investors on May 24 that its AI-related business is booming. Revenue for the second fiscal quarter is expected to be approximately $11 billion. Wall Street predicted it to be worth about $7 billion.
And after May 24, analysts raised calendar year 2024 revenue estimates to about $51 billion from $37 billion. Estimates for 2024 earnings per share are approaching $10 from less than $6.
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It was all a lot for investors to digest. The good news is that they probably have time to catch their breath. Shares are down about 2.5% in Wednesday morning trade and the stock appears to be significantly overbought.
“Way” isn’t really a technical term, but Nvidia’s Relative Strength Index (RSI) is around 85. The RSI can basically fluctuate between zero and 100. A high number means the stock has risen sharply. fast. In other words, a lot of good news is reflected in stocks. A reading above 70 is usually considered overbought, which may mean that stocks are about to pause.
Tuesday’s “high” was possible [a] peak at least for some time in the future,” Rick Bensignor, founder of Bensignor Group and former Morgan Stanley chief market strategist, wrote in a research note Wednesday, noting that “Elliot Waves,” another technical indicator, is exhibiting $415 indicates a front runner at the moment.
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Elliot Waves look a bit like mountain peaks and valleys, like they use nature to predict natural stock price movements. They may seem unclear, but when a stock goes parabolic, everyone has to look for answers. Ripples could indicate the stock could rally back towards $350 as conditions cool.
Market expert Katie Stockton, who is also the founder of Fairlead Strategies, sees some support around $366 per share.
“So no, I’m not an Nvidia buyer now,” Bensignor added. “And honestly, I have no problem selling covered calls in it or even reducing some long-term exposures.”
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A covered call option is a strategy in which 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 will trade above the call option strike and the call seller will lose this upside potential, thereby missing out on some gains from their original position.
Bensignor isn’t making any fundamental claims or forecasting where AI can take Nvidia sales going forward. In general, it’s a good idea to sell a little when stocks are rapidly rising sharply. How much to sell really depends on the type of investor. Dealers will sell more. Long-term investors will sell less.
Write to Al Root at [email protected]