Nvidia stock is overbought and due to fall. Just look at the lists.
Nvidia had its AI moment and the stock went bananas. Wall Street is frantically raising estimates, leaving investors to wonder if the stock is too expensive, too cheap or valued just right. It’s hard to know what to do with stocks now. The stock charts are as good a place to start figuring it out.
Looking at stock charts, or technical analysis, is one tool in an investor’s, or a trader’s, toolbox. Charts can tell a story about emotions and when things are a little too euphoric or too miserable.
As for Nvidia (ticker: NVDA), euphoria is building. In trading on Wednesday, shares were up nearly 30% over the past five days. Nvidia was responsible for more than its fair share of
Nasdaq Composite
3% gain over the same period. Of course, Nvidia is not one
Dow Jones Industrial Average
component, which was of 0.5%.
The reason for improving sentiment is easy to find. Nvidia told investors on May 24 that AI-related business was booming. Revenue in the second quarter is expected to be around 1[ads1]1 billion dollars. Wall Street had estimated closer to $7 billion.
And after May 24, analysts moved sales estimates for calendar year 2024 to about $51 billion, up from $37 billion. Earnings per share estimates for 2024 approach $10 from less than $6.
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It has been a lot for investors to digest. The good news is that they probably have time to catch their breath. Shares fell around 2.5% in morning trading on Wednesday, and the stock looks far overbought.
“Way” isn’t really a technical term, but Nvidia’s relative strength index, or RSI, is at about 85. The RSI can essentially fluctuate between zero and 100. A high number means the stock has gone up a lot, quickly. In other words, lots of good news reflected in stocks. A reading above 70 is usually considered overbought, which may mean stocks need to take a break.
Tuesday’s “height was possibly [a] top, at least for some time to come,” Rick Bensignor, founder of The Bensignor Group and former market strategist at Morgan Stanley, wrote in a research note on Wednesday, noting that “Elliot waves,” another technical indicator, point to $415 is a peak in the stock for now.
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Elliot waves look a bit like mountain peaks and valleys, sort of like using nature to predict natural stock price movements. They may seem obscure, but when a stock goes parabolic it leaves everyone scrambling for answers. Waves could suggest the stock could head back towards $350 as things cool down.
Market technician Katie Stockton, who is also the founder of Fairlead Strategies, sees some support around $366 a share.
“So, no, I’m not now a buyer of Nvidia,” Bensignor added. “And frankly, I have no problem selling covered calls in it or even shorting any outright long exposure.”
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A covered call option is a strategy in which an investor who owns a stock sells a call option (the right to buy that stock at a fixed price) to another investor. Covered call sales take advantage of price volatility and generate some income for the investor. The risk is that the stock trades above the strike price of the call option, and the call seller loses that upside, giving up any profit on his original position.
Bensignor isn’t making a fundamental call or predicting where AI might take Nvidia sales in the future. Selling a little when stocks are rising a lot quickly is generally a good idea. How much you should sell really depends on the type of investor. Traders will sell more. Investors in it in the long term will sell less.
Write to Al Root at allen.root@dowjones.com
