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Chart Of The Day: What Is Overshadowing NVIDIA's Earnings?

Economy
04.08.2021
908
Chart Of The Day: What Is Overshadowing NVIDIA's Earnings?

NVIDIA (NASDAQ:NVDA) is due to release its corporate results on Aug. 18 after the market close, but investors may be concerned with a more imminent development that could impact the stock.

The UK is assessing the implications of the Santa Clara, California based firm’s acquisition of Arm, citing national security. Meanwhile, NVIDIA published an advert, boasting that the $40 billion merger is “creating the premier computing company for the age of AI.”

At the same time, its biggest competitor, Advanced Micro Devices (NASDAQ:AMD) has just reported its fifth straight set of record earnings.

Let’s see how these concerns are impacting the trajectory of the stock ahead of its earnings.

The price has been ranging in a crowded trade within an upward slant. Given that the preceding move was a three-day straight sharp selloff, these pattern characteristics are the telltale signs of a setup for another leg down. However, let’s look at the whole picture.

The selloff followed a dip below and attempted return above the uptrend line. The rebound took place above the top of its former rising channel, joined by the 50 DMA. Volume spiked amid the selloff but dried during the preceding rally—demonstrating where the power is, downward.

It’s important to understand how everything fits into the supply-demand puzzle to attempt to assign weight to any piece of evidence.

A rising flag is made up when lucky short sellers concerned that they may have overdone it, quickly close positions, before the stock rallies. Covering the short position creates demand, pushing the stock higher, but notice that the rally is congested, not at all like the straight line in which the price slid beforehand. That demonstrates that there is ample supply—perhaps from secondary short sellers, upset that they missed the first sharp selloff—to fill in the early short-seller’s demand.

When the price forms a downside breakout, it evidences that the ongoing supply met all the demand created by profit-taking (as well as some unlucky bulls, who don’t know they’re about to be overrun by a stampede.)

Now, it makes sense that bears, who stopped to catch their breath after a rushed selloff, would exit when reaching the top of the former rising channel—as broken support turns to resistance, as traders remember the 23% jump by the stock after breaking that resistance, and may hope for another run.

However, if the flag will complete decisively, it may set into place a market chain reaction, with the early short sellers jumping right back in, helping the new bears to push prices down another leg. If the flag completes, and the stock follows through with another leg down, the price will have established a new medium downtrend, though the long-term remains in an uptrend, which may synchronize with earnings.

Trading Strategies

Conservative traders should avoid a trade that goes against the long-term trend.

Moderate traders should wait for the peak-and-trough downtrend to be established.

Aggressive traders could short upon a downside breakout.

Whatever your risk tolerance, if you’re trading without a plan, you’re not trading. You’re gambling. Here’s an example:

Trade Sample

  • Entry: $195
  • Stop-Loss: $200
  • Risk: $5
  • Target: $180
  • Reward: $15
  • Risk:Reward Ratio: 1:3

Author’s Note: This is just a sample. It isn’t the one correct way to approach this trade. It is not the analysis either. That is in the body of the article. If you hadn’t read and understood it, do NOT trade. As well, we do NOT know the future. This is merely our interpretations based on technical analysis, which is a statistical expectation based on past performance. In other words, these outcomes happen overall, not each time. So, the follow-through may not take place this time. Successful trading is determined overall, not on a trade-by-trade basis, as traders “manage their luck” by attempting to side with statistics.

Moreover, our interpretation may be wrong. Finally, your personal circumstances and temperament will directly affect the results of your trades. You must develop your personal style that includes plans that incorporate your budget, risk tolerance and timing. Until you do so, you are welcome to use our samples, with the understanding that they’re for educational purposes—till you learn how to develop your own plans—not profit. Or you’ll end up with neither. Guaranteed, nor your money back.

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