Let me get something out in the open, the long-term outlook for NVIDIA (NVDA) is bullish. But not every investors wants to experience a possible 20% drop in the value of their NVIDIA holdings.
The stock is the innovator of the decade with their AI chip designs, and they’re still developing new technology. Five years from now, the stock is going to be higher. I think everyone agrees on that.
But as I pointed out on Wednesday, NVIDIA shares are set up for a 15-20% drop.
The stock is trading about 10% lower than Wednesday’s highs as investors are becoming increasingly nervous over inflation.
This morning’s jobs report was much stronger than anticipated, meaning that the Fed is even less likely to drop interest rates at their next meeting. This, along with what may be a bumpy earnings season (that kicks off next week) increases uncertainty for investors.
On Wall Street, uncertainty is a four-letter word, which is why we’re starting to see cracks in the market and NVIDIA stock.
As of this morning, NVIDIA shares dropped through support from two different technical features.
Shares dropped below the stock’s 20- and 50-day moving averages shortly after the open.
The 20-day moving average is referred to as “The Trader’s Trendline” due to its faster response to a stock’s price change. Short-term traders rely on this trendline to forecast the directional moves of a stock over the next 2-4 weeks.
The 50-day moving average is one of the most widely watched technical trendlines. More investors use this trendline as a forecasting tool. For this reason, moves above and below this trendline have a larger impact on where a stock is likely to go over the next 4-6 weeks.
The fact that both the 20- and 50-day moving averages were breached on the same day means that more sellers will be entering the market to drop the price of NVIDIA.
It’s one thing for a stock to break above or below its 50-day moving average, but the stock’s trend is an even more important indicator.
Historical tests on the S&P 500 stocks show that a stock has a 2/3 chance of closing higher when its 50-day moving average is in an uptrend. The reverse is also true that a stock is 2/3 likely to close lower each day its 50-day is trending lower.
NVIDIA’s 50-day trend is in the process of switching from a bullish trend higher to a bearish trend lower.
The implications for the stock are simple, NVIDIA will be facing a headwind through earnings season, adding even more uncertainty to the market.
Here is the current price chart for NVIDIA.
The thing I hear often from friends is that they don’t want to sell NVIDIA or any of the other Magnificent Seven stocks because of their lofty gains.
NVIDIA shares are up more than 150% over the last year, that’s including the recent 15% correction. Selling now may lock in that 150% gain but it would also qualify those gains as short-term capital gains and open them to a larger tax bill.
As always, talk to your tax planner when it comes to capital gains treatments.
Instead of selling the stock from a portfolio my response, and strategy, is to simply hedge a position like NVIDIA to offset the potential for further losses.
I know, you’re rolling your eyes right now because you think this involves options.
Wrong! It’s much easier with NVIDIA and a handful of other stocks.
Due to their popularity, NVIDIA and several other “Magnificent” stocks have an easier way to hedge against downside risk like we’re seeing in the market now.
In the height of the 2022 bear market a new line of ETFs was introduced to the market. Their goal was simple, to offer stock traders a way to short an individual stock, like NVIDIA, by buying an individual share.
Tradr ETFs launched a series of single stock inverse ETFs on several companies including NVIDIA as a vehicle to allow investors to hedge specific single stock positions. The company also offers a similar ETF to hedge Tesla stock.
According to the company, the Tradr 1.5X Short NVDA Daily ETF (NVDS) shares “seeks daily investment results, before fees and expenses, that correspond to 1.5 times the inverse (‑150%) of the daily performance of the common shares of NVIDIA Corporation (NVDA).”
That means that each share of the NVDS will go up roughly 1.5% for every 1% decline in NVIDIA stock.
For many investors, this provides a reasonable method to avoid a large downside position without selling shares of NVIDIA in your portfolio.
NVIDIA is one of the simpler stocks to label with trigger prices. Investors just have to remember to “watch the tens”.
What that means is that because NVIDIA is trading between $100 and $150, the stock is more likely to be sensitive to $10 increments.
Note the stock’s recent rejection at $150 dropped shares back to $140.
From there the stock will drop to $130 and then $120 where NVIDIA’s 200-day moving average comes into play.
This long-term trendline combined with the round-numbered $120 should act as a hard level for NVIDIA stock to break and likely a good “buy the dip” price for investors looking to add shares of NVIDIA to their portfolio.
