Before releasing its earnings after the close Thursday, chipmaker Nvidia had been on fire so far in 2017 with a gain of 54.3% year to date, and up 146.8% since trading as low as $66.75 at its post-election boundary set on Nov. 10. This post-earnings decline is a popping bubble, and investors should be reducing holdings on strength.
Nvidia closed at $164.74 Thursday and the negative reaction to earnings had the stock trading as low as $151.46 in after-hours trading. This is the first significant negative reaction to earnings since the rise in the trading for bitcoin began in 2016. Nvidia stock traded down 6.73% to $153.72 per share Friday morning.
The company beat earnings estimates after the close but the stock plunged nonetheless given its parabolic formation on its weekly chart. A parabolic occurs when the weekly chart becomes positive but overbought and reaches or exceeded longer-term risky levels. This was the case for Nvidia.
This leaves Wall Street with egg of its face. On Wednesday, Jefferies reiterated a buy rating, expecting a beat of this estimate. They cited increases in revenue from gaming applications and from its data center. They also saw strong demand for GPUs for cryptocurrency, which makes the charts for bitcoin correlate to the charts for Nvidia.
The options market expects earnings volatility of 8% up or down about $14 a share. Volatility exceeded this to the downside suggesting that the parabolic bubble was popping. Despite this volatility investors should trade Nvidia rather than bitcoin, as say bitcoin could be like the Tulip craze and bust of 400 years ago. I agree, so avoid bitcoin and buy weakness in Nvidia if you were interested in the bitcoin phenomenon.
The Weekly Chart for Nvidia
Courtesy of MetaStock Xenith
The weekly chart for Nvidia ($164.74 on Aug. 10) is positive but overbought with the stock above its five-week modified moving average (in red) at $157.55. The stock is above its 200-week simple moving average (in green) and "reversion to the mean" at $46.19. This huge differential to the five-week MMA is a parabolic warning. The 12x3x3 weekly slow stochastic reading is projected to end the week at 87.66 well above the overbought threshold of 80.00.
Investment Strategy: Buy weakness to my quarterly value level of $138.46. My monthly pivot is $162.15. Sell strength to my weekly risky level of $167.87.
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This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.