Let's start by getting a few disclosures out of the way.
First, I do have a position in NVIDIA (NVDA). I mean, who doesn’t at this point?
Second, I do not think that NVIDIA is going to drop 50% in the next two weeks.
Finally, I think that NVIDIA's business justifies its $3.2 trillion market capitalization.
OK, with that out of the way, let’s talk once again about how NVIDIA is the world’s most dangerous stock.
If you didn’t catch it last month, check out my video explaining why NVIDIA is dangerous by clicking here.
Yesterday’s price action gave you a glimpse of how things are going to go down when they do.
Get ready.
Like any other day of the week, NVIDIA shares took off strong out of the gate, up more than 3% at the open. At the close, the stock was down 3.54%.
This morning, the stock is trading 3.4% lower on volume that is already heavier than normal.
Let’s talk about a few of the “natural” contributors to NVIDIA’s volatility.
First, NVIDIA’s push higher on Thursday took the S&P 500 to its new all-time high of 5,500.
We’ve talked a lot about round numbers and their ability to act as psychological support and resistance. 5,500 is going to be a level that professional traders and algorithms will be watching closely. Do not be surprised to see the S&P 500 and other major indices take a break from their breakneck rally, especially given the historical seasonal weakness that goes with May.
NVIDIA is the largest contributor to the S&P 500’s movements. This means that if the S&P 500 runs into resistance, it will translate into magnified selling pressure on NVIDIA shares.
With NVIDIA trading in technically overbought territory, it just doesn’t have the strength to keep carrying the rest of the market on its shoulders.
Finally, keep in mind that today is expiration Friday for equity options. NVIDIA and other large-cap technology companies are likely to see increased volatility in the day approaching options expiration. This is due to the extremely large option positions on the stock that will be closed out ahead of the market’s close.
Add all of this together, and we’ve got a situation where it is going to be natural to see NVIDIA give up some ground.
Where does the stock go? Let’s look at the chart.
The “natural” target for the stock over the next week will be the $120 price. This is not only where the stock saw some resistance just over a week ago, but it’s also the spot where NVIDIA’s 20-day moving average sits.
I call the 20-day moving average the Trader’s Trendline because it often represents where short-term traders identify buying and selling prices.
If we see NVIDIA break below $120, then there is a very good chance that the stock will move to $100, which is also where we see “double support.”
The first round of support at $100 is from the stock’s 50-day moving average. This is the most widely watched trendline. Technical or chart traders will jump over each other to buy NVIDIA at its 50-day.
NVIDIA would garner a second round of support at $100 from the round number psychological support. Traders increase buying and selling at round numbers. After NVIDIA’s split, $100 is the most important number for it to hold as support.
Bottom Line
The weakness in NVIDIA shares is natural, but that natural weakness could also spark some panic selling in the market. I expect that we’ll see NVIDIA trade to $120 next week where the real test will happen.
Failure for NVIDIA to hold that price will result in a target of $100 over the next few weeks. Shockingly, that would represent a 28% drop from last week’s highs but would generate one heck of a buying opportunity for those investors who have been waiting for an opportunity to grab this AI wonder.
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.