Shares of Nvidia Corporation (NASDAQ:NVDA) rallied close to 18% on Wednesday, May 10, following another great earnings report and promising outlook. NVDA stock had been in a bigger-picture consolidation phase since late December 2016, but Wednesday’s breakaway gap and rally has reawakened the animal spirits and left the naysayers scrambling to cover short positions.
Nvidia beat both on the top and bottom lines in its most recent quarter, and among the highlights for the outlook included a new deal with Toyota Motor Corp (ADR) (NYSE:TM) for driverless cars.
This spurred a flurry of analyst upgrades in Nvidia stock, many of whom tossed around price targets in the $120s and $130s.
From a tactical perspective, both active and longer-term investors are rarely rewarded for chasing stocks higher after steep runs.
While Nvidia’s 2016 rally was near epic proportions, it did ultimately lead to a pair of roughly 20% pullbacks — late 2016 to early 2017, and again from February to March of this year.
Those who chased the December 2016 and February highs were likely shaken out of their “weak hand” positions during those two pullbacks.
However, those growth investors with a longer-term horizon are now following Wednesday’s rally in NVDA stock at peak performance.
Alternatively, the more active type of investor who was a seller into the December and February rallies can now buy the stock at similar levels. Plus, they’ll have much better odds of success given the multimonth consolidation phase.
Let’s dig into the technicals.
NVDA Stock Charts
When I last discussed Nvidia on March 28, I said that the stock’s tight consolidation pattern at the time could lead to a new break higher upon a daily close above the $110 area. However, shares never closed back above $110 and thus did not trigger a valid buy signal.
Since then, NVDA has had more time to regroup. And now, as a result of Wednesday’s post-earnings rampage, it looks like it’s back to racing with the bulls.
On the multiyear weekly chart, we see the multi-month consolidation range that NVDA stock has been in since late 2017.
This consolidation phase followed a historic rally throughout 2016 as Nvidia became the darling stock of every chart-chasing hedge fund manager out there.
The bears will point out that while Wednesday’s rally did break NVDA stock past diagonal resistance, as marked by the red dotted line, it has so far only marginally overcome its February highs on a daily closing basis.
On the daily chart, however, we see that Wednesday’s post-earnings rally came on the back of a notable breakaway gap (on huge volume). This broke the stock away from the multimonth consolidation range.
Will Nvidia continue ramping higher at Wednesday’s rate from here on forward?
Most likely, shares will need to do some backing and filling before making another move higher. Traders and investors could re-initiate partial long positions in the low $120s and add upon a little pullback or consolidation phase.
Alternatively, options traders could consider selling out-of-the-money put spreads as a way to “leg into” a long position in NVDA stock. As a for-instance, consider a July $110/$105 put spread.
— Serge Berger
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Source: Investor Place