Nvidia Corp. (NVDA) and chart reading 101. Nice headline, if I say so myself. We wrote about NVDA earlier this month. We discussed the strong rise the stock had seen and added: "In this three-year weekly bar chart of NVDA we really don't have any bearish signals, but we can see a parabolic rise the past two years. After seeing this kind of rally many times in the 1970s, I learned that late entries are very risky...It would be nice to believe that this time is different, but my old brain cells remember that parabolic advances tend to not end well."
You can read Jim Cramer's take on what happened with this one-perfect stock after the company posted earnings in the article he wrote earlier on Friday.
This Friday morning, NVDA is trading around $153, down around $11 or more in pre-market trading. If you bought NVDA near its 52-week high of $172.66, you are not a happy camper. This update is not to gloat or say "I told you so". Not professional. This morning, I want to give you an update and show you how I read charts. Teach a man to fish, so to speak...
In this daily bar chart of NVDA, above, we have prices updated through Thursday's close. You will have to imagine today's gap lower, with prices around $153 or so. Prices are below the rising 50-day moving average line, and the recent action in the $160-$172 area should now act as resistance. If you wake up to prices at $153 and you are long from higher levels, there is a big urge from down in your intestines somewhere to "get even", and you want to sell at your entry point.
Reading the chart from right to left (like Hebrew), we can see that the next low point where buyers came in is the $140 area. This should be considered nearby support. Some support areas are more significant than others. Significance can be judged by three criteria: How long were prices in that area? How much volume was traded in the area? and How recent is this zone?
The longer prices are in an area, the more people can remember the level and react to it again (if NVDA ever gets back to $140 again, I want to be a buyer). The more volume in an area tells us that others have seen the area and reacted. The more recent a support zone, the better. The farther back in history on the chart, the less reliable the zone is, as traders have had plenty of time to forget or adjust positions. Quiz -- where is the next support zone if $140 is broken?
What else does the chart show? The daily On-Balance-Volume (OBV) has not turned lower, but that could change quickly. The Moving Average Convergence Divergence (MACD) oscillator is signaling another take profits sell signal.
In this weekly bar chart of NVDA, above, we don't have any sell signals, but we can read the chart. Again, where is support below $140? The answer, in my opinion, is the $110 to $95 area, where prices traded for about four months. The rising 40-week moving average line intersects around $120 now.
In this Point and Figure chart, above, we can see through Thursday that the trend was still up. On the left side of this chart is a tool called volume at price. It organizes volume by price, and not as a bar below the price action. There is a cluster of volume in the $150-$140 area and then another cluster of volume in the $110-$97 area.
Strategy: First, calmly take a deep breadth. Repeat. What is your cost basis?
If you are long NVDA from below $110, then I probably wouldn't panic. If you are long from around the last dip or in the $140s, then you need to think about how you would react or feel if prices broke below $140. This is not a forecast, but rather something I try to get my students at Baruch College to think about.
When a stock position goes from a profit to a loss, a different mindset takes over. Offense versus defense.
Can you make a decision to exit and come back in at a better trade location, or will you get hung up on tax issues, and this and that? Class dismissed.
(This column originally appeared at 8:31 a.m. ET on Real Money, our premium site for active traders. Click here to get great columns like this from Bruce Kamich and other writers even earlier in the trading day.)