NVIDIA Corporation: Don’t Get Baited by NVDA Stock Returns

NVIDIA CorporationNVDA Stock: Don’t Chase This Stock

Chasing stocks that have already run up can be a dangerous game to play. NVIDIA Corporation (NASDAQ:NVDA) stock is up an impressive 77% year-to-date and falls right into that category. How many times have we, as retail investors, finally put our money to work, only to see shares drop off? It is not an uncommon phenomenon. I have done it a few times and I admit that it isn’t the greatest feeling.

It usually is a more common occurrence, though, when we employ the idiotic strategy of impulsively buying a stock because it crossed a major new source. We know better, yet we continue to fall for the same pitfalls.

I used to fall into this trap. However, after numerous pitfalls and many lost dollars, the pain was too much to bear and I decided to simplify my trading strategy by adding rules.  I vowed to trade only using trading signals that confirmed my premise. If the signals confirm them, with a proper risk strategy, I should be comfortable with chasing the stock. We cannot dismiss a stock just because it has already moved higher.

The following signals from my toolbox are an example of how I might determine if a pick like NVDA stock is worth chasing.

The following chart illustrates a signal called the golden cross:

NVIDIA Corporation NASDAQ Chart

Chart courtesy of www.StockCharts.com

On May 9, 2013, NVDA stock generated a golden cross on the chart. A golden cross occurs when the faster moving average (the 50-day moving average) crosses over and above the slower moving average (200-day moving average). This is a bullish signal traders use to confirm a bull market is ahead.

In mid-August 2015, the moving averages were on the verge of executing a death cross. If you are unfamiliar with this signal, it is the exact opposite of a golden cross, confirming a bear market is on the horizon rather than a bull market. In the case of NVDA stock, that signal was averted. Averted signals confirm the continuation of the current trend and have a tendency of accelerating that trend.

The long position from the golden cross and the averted signal would have generated a paper profit of 340% holding NVDA stock. That’s not something to shrug your shoulders at.

The golden cross is still suggesting a bull market but there is a slight problem using this signal after a stock has made a significant run: by nature, this signal is a lagging indicator that uses past data to generate a trading bias, meaning it’s great at confirming a trend, but does little to warn an investor of a possible tuning point.

I am also concerned with how far NVDA stock is trading above the 200-day moving average. The 200-day moving average is the average share price the stock has held over the last 200 trading days. Trading above the average is bullish and trading below the average is bearish. There are also extremes—too far above or below is seen as a reflection of extreme sentiment and is unsustainable. Extreme sentiment can signal that a reversal is on the horizon. NVDA stock is trading at an extreme margin above the 200-day moving average.

The following chart illustrates possible resistance levels:


Chart courtesy of www.StockCharts.com

The long-term chart above paints a picture that cannot be ignored. Connecting the peaks forms a long-term resistance line (highlighted in blue in the chart). In 2002 and 2007, this line rejected the share price and a bear market ravaged shares on both occasions. Could this be a coincidence? Yes, of course it could, but I am not going to refute it.

The Bottom Line on NVDA Stock

Using the signals that I employ in my trader’s toolbox, I would not chase NVDA stock. Yes, the signals are still bullish, but sentiment is reaching an extreme and the long-term chart portrays a possible resistance line that has marked previous highs. It would go against my best judgment and give me great anxiety to initiate a position here.

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