Nvidia Short-Sellers Need to Be Wary

Last month’s Q2 earnings from Nvidia (NVDA) were one of the most highly anticipated of the earnings season.

And NVDA did not disappoint.

The microchip manufacturer, with its class-leading AI chips, smashed forecast revenue by a massive $2.3 billion. That’s a full 100% jump from the same quarter last year.

What’s more, NVDA predicted even bigger growth ahead.

But after initially rallying off those results, NVDA has steadily fallen.

Now NVDA is down around 18% from its high, and short-sellers may see a big opportunity if the stock continues to fall. But there’s reason to be wary of taking on short positions right now.

So let’s see what’s coming next for this closely watched stock…

No New Buyers

The chart of NVDA below shows just how far it rallied from October last year.

NVDA gained a massive 365% from those lows before topping out after Q2 earnings last month. That move saw its market cap jump from $280 billion to over $1.2 trillion.

Nvidia (NVDA)

Source: eSignal

As you can see on the chart, the first part of NVDA’s rally was quite orderly.

Both MAs steadily climbed after the 10-day moving average (MA, red line) crossed above the longer-term 50-day MA (blue line).

And after breaking through resistance (green line), the Relative Strength Index (RSI) bullishly tracked in the upper half of its range.

But NVDA’s rally began to accelerate when it gapped higher off the back of Q1 earnings in May.

You can gauge the strength of this second part of NVDA’s rally by the way the 10-day MA jumped strongly above the 50-day MA.

However, when we checked in on NVDA last month (red arrow), I warned about a diverging pattern that hinted at a change of direction.

Take another look:

Nvidia (NVDA)

Source: eSignal

Despite NVDA rallying to fresh highs, the RSI (red line) was showing a steady decline in momentum. That suggested there might not be enough new buyers to sustain NVDA’s rise. When momentum continues to fall like this, it will eventually pull a stock lower.

And as you can see, that is how things played out.

NVDA rolled over with the RSI continuing to fall through support and into its lower band.

In the space of a month, NVDA is now down close to 20% off its August high as it has struggled to attract new buyers.

Despite this sell-off, though, we need to remember that markets overshoot in both directions.

NVDA had overshot in its massive run-up. But we now need to keep a close watch to see if NVDA could be stretching itself too far on the way down.

If it has, then it could be setting itself up for a potential bounce.

So what am I looking for next?

Watch Both These Levels

After the RSI’s big fall this past month, it’s now closing in on oversold territory (lower gray dashed line).

That’s happening right as NVDA is testing a short-term support level (as shown by the horizontal orange line).

I’ll be watching the action around both these levels closely this coming week.

If the RSI forms a “V” and rebounds back toward resistance (green line), then NVDA will likely hold support and potentially bounce higher.

Such a move could quickly put NVDA trading back around $440–$450. And that would provide the opportunity for a quick mean-reversion long trade.

However, we also need to watch out for any dead-cat bounce.

If the RSI gets stuck sideways in its lower range instead, then that will pull NVDA down through support and set off another leg down.

Regards,

Larry Benedict
Editor, Trading With Larry Benedict

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