Trader's Daily Notebook: Maybe Nvidia Was Simply Misunderstood

 | May 10, 2017 | 7:00 AM EDT
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Stock quotes in this article:

nvda

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IWM

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spy

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QQQ

Demand for E-Mini S&P 500 futures (Es) contracts fell flat as price tested the big figure (2400). Regular-session volume came in under 1 million contracts, which we've become accustomed to, suggesting investors remain unmotivated by and unwilling to chase current prices. Nevertheless, value remains stable and price continues to close above all short and intermediate timeframe moving averages. For the time being, odds continue to favor bulls (primarily responsive dip buyers). 

In Tuesday's Trader's Daily Notebook, we briefly discussed the difficulties the iShares Russell 2000 ETF (IWM) was having in joining the SPDR S&P 500 Trust (SPY) and PowerShares QQQ Trust (QQQ) near major swing highs. Take a moment to review the two charts below. 

iShares Russell 2000 ETF (IWM) -- Daily
iShares Russell 2000 ETF (IWM) -- 15-Minute Intraday

Tuesday's auction marked the fifth day in a row the IWM has spent virtually the entire session churning between the 10-day and 21-day exponential moving averages (EMA). At this point, for better or worse, I'm confident everyone is focused on the same thing. A close above $139 would be expected to attract buyers, while a close under roughly $138 likely triggers stop losses among recent dip buyers. Yes, that's a pretty narrow range. 

Those focused on the day timeframe should continue to focus on the $138.75 to $139 area highlighted in Tuesday's note. As value migrates above $138.75, our expectation will be for a sustained break above $139 during that session's auction. As far as a bearish break is concerned, a sustained slide beneath $137.80, while not the lowest point over the past five trading sessions, would likely begin to trigger some selling. 

Shortly after Tuesday's equity close, Nvidia (NVDA) , a stock every tech bull was in love with by the end of 2016, reported strong earnings. For the record, Nvidia was the second-best performer in the SPY, finishing 2016 with a gain of nearly 225%. Prior to Tuesday's after-hours surge, the stock was down around 3.5% on a year-to-date basis. 

As we often see in our instant-analysis, social-media-saturated world, a number of folks took to Twitter shortly after the report to slam anyone who had been negative on the name over the past five months. Based on the company's most recent reports, I suppose it's fair to say anyone suggesting Nvidia wasn't knocking the cover off the ball probably deserves to catch a bit of flak. 

But what about folks who suggested the stock had simply gotten way ahead of itself, and was overextended on a technical basis? 

In late December, Nvidia traded as high as $120 while the 200-day simple moving average (SMA) was still making its way above $60. That's one heckuva premium over our higher timeframe moving average! The bottom line is even great companies with innovative technologies can reach a level where purchasing their stock results in too great a risk relative to near-term or intermediate-term reward. Know your timeframe. Know your trading strategy. And never forget that money management and risk analysis should always trump your love for, or opinion of, a company and its products or services. 

As far as a near-term trading strategy is concerned, I'd expect traders following a momentum approach to begin jumping on NVDA above $120. And that's exactly where I'll begin paying attention. 

Moving on to Wednesday's Es auction, we'll measure the regular-session open based on its location relative to 2392.75. An open above that level that holds VWAP and begins to trade higher would be expected to move toward 2400. I believe it's fair to assume most traders will be judging near-term initiative demand based on value migration above 2400. As value migrates above the big figure, the door reopens for buyers to aggressively auction prices higher. 

15-Minute S&P 500 Futures Volume Profile

An open beneath or failure to remain above 2392.75 doesn't have to trap buyers, but it does place a giant target on 2387 to 2388. As long as any dips beneath that one-handle area are short-lived, I wouldn't expect buyers to panic. Value migration beneath 2387, however, would likely trigger an immediate decline toward 2375. 

Any trading or volume profile related questions can be posted in the comments section below, emailed to me at parkcityyeti@gmail.com or posted to my twitter feed @ByrneRWS

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