I love it when we see stories like this a few weeks ahead of a company’s earnings report.
This was literally the headline that I saw this morning when I popped CNBC.com up for the first time. Right there at the top of the page is the headline declaring that Nvidia (NVDA) is in a “correction.”
First, good reporting from CNBC. The stock is trading 10% lower than its recent highs, the definition for a correction.
Second, the article introduces a subtle fear for Nvidia investors with the mention of Intel (INTC)’s new Gaudi 3 chip, aimed at being a competitor in the GPU universe.
Now, let me address the last piece first. I love Intel as a long-term investment in the chip fab business, but to think that Intel is going to make a dent in the Nvidia GPU market right now? Nope.
The addition of this “news” to the headline title is tantamount to adding my name to the list of Olympic hopefuls for the 2026 Team U.S.A. Hockey Team.
You get my point? There’s nothing there to trade.
But the 10% decline? Yeah, there’s something there that I’m ready to trade.
Over the last few weeks, Nvidia shares have made a somewhat of an expected move from their highs as stockholders sell to take profits from the recent 100% rally from the beginning of the year.
The move is also expected as we see investors prepare for the company’s upcoming earnings report to be released on May 22.
Historically, we see a heavy “sentiment seasonality” move in NVDA shares that begins a little more than a month from the report.
The first phase of this move includes a dip in the stock as investors lock in their recent profits to avoid potential volatility surrounding the upcoming report. Last quarter, we saw a similar 10% decline in December, followed by a 10% rally that held the stock until their earnings report.
A constant in these pre-earnings corrections, as well as others since 2021, is the stock’s 50-day moving average.
Currently sitting at $813, Nvidia’s bullish 50-day moving average is in the perfect position to provide investors with exactly what they need… a “trigger price.”
What I mean by that is that the stock is likely to see another short-term 5% pullback to its 50-day moving average, especially with the market’s broader weakness.
That touch of the 50-day will serve as the trigger to begin adding more exposure to Nvidia to my portfolio ahead of the May 22 earnings call.
With a price of roughly $800, I’ll utilize two approaches to increasing my portfolio exposure.
- Straight purchases of the stock. Using a limit order of $800, just below that 50-day, I will add shares of Nvidia to my portfolio as a long-term hold. My outlook on those shares will be to hold for another two years with a stop price that represents a 20% from highs pullback, or a break of the stock’s 200-day moving average. We’ll get into the details on stops at some point in the near futures.
- My second method of adding exposure to Nvidia is to use long-term options that expire in January 2025. Using my options calculator, I estimate that the January 17, 2025 $900 call options will cost around $97 per contract with the stock at $800. A purchase of this option allows me to leverage my portfolio’s buying power while controlling 100 shares of the stock for a total of $9,700 instead of $80,000 if I just bought the stock.
Bottom Line
CNBC’s headline represents the type of “fear” that I like to see building on a name like Nvidia ahead of their earnings event.
We hear about how stocks climb a “Wall of Worry,” these headlines and others about the overvaluation of Nvidia are a great sign that the stock is set to tread even higher.
About the Author
Chris Johnson (“CJ”), a seasoned equity and options analyst with nearly 30 years of experience, is celebrated for his quantitative expertise in quantifying investors’ sentiment to navigate Wall Street with a deeply rooted technical and contrarian trading style.