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Stocks  | October 10, 2019

The stock market came under pressure again on Tuesday. Investors didn’t respond well to the latest news out of the Fed and concerns around a U.S.-China trade deal flared up again. Among the victims on Tuesday were the semiconductor and related stocks such as Nvidia (NASDAQ:NVDA). NVDA stock rejected a technically important area on its chart and now points lower again.

Before looking at NVDA stock more closely, allow me to remind ye faithful that when it comes to financial markets, the dog wags the tail. This is to say that the bigger picture economic news or broader stock market moves will dictate what most risk assets will do.

Barring major idiosyncratic news around a single name stock, any given stock will gyrate with the broader market movements, particularly during times of high headline risk (such as the current market is subject to). This is particularly important this week as U.S.-China trade talks resume and major headline risk will likely affect most risk assets. In other words, while the below trade idea on NVDA is valid, keep in mind that the bigger picture headlines will likely move this stock in one direction or another in the near-term.

As I have been pointing out in this column all year, the major equity averages for the most part have struggled to make meaningful new highs since the blowoff top in global equities from late January 2018. This also holds true for plenty of semiconductor names, including NVDA stock.

NVDA Stock Chart

Looking at the big picture multi-year chart we see that after squeezing to a marginally higher high in early October 2018, NVDA stock dropped by more than 50% in the fourth quarter of 2018. For the year-to-date in 2019 the stock has largely traded in a well-defined sideways range, which is to say that the upper end of the range has repeatedly found sellers while the bottom of the range ushered in buyers.

Over the past couple of weeks NVDA stock has once again found resistance at the upper end of this range and barring any outstanding fresh news either from an economic perspective or from within the semiconductor industry, this stock remains range-bound.

On the daily chart we see that on Sept. 12th and again on Oct. 7th NVDA stock has shown exhaustion buying (red arrows). The Oct. 7th exhaustion buying candle was then followed on Oct. 8th with a meaningful down-day, thus confirming the recent highs in the high $180s as an area where buyers get exhausted.

Active investors and traders now have a well-defined area of technical resistance (the high $180s) to lean against for short-side trades in NVDA. A next downside target in the mid-to-high $160s makes sense.

The highest probability trade that sets up well for this set up in NVDA as well is to sell an out of the money call spread (options credit spread) in a very specific way. I am hosting a special webinar Wednesday Oct. 9th to go over this setup in detail.

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