Nvidia Corporation (NVDA) is a buy on weakness to its “reversion to the mean” at $118.60 and to its annual value level at $115.61 as its momentum reading is so oversold it’s “too cheap to ignore”.
Nvidia was one of the strongest momentum stocks since February 2016. The stock was up 11.8-fold from $24.75 during the week of Feb. 12, 2016 to its all-time intraday high of $292.76 on Oct. 2. Since the high, the stock has plunged by 55.2% to its 2018 low of $124.50 set on Dec. 24.
Nvidia is an important semiconductor stock as it provides chips used in gaming applications, which had been the important driver during the momentum run-up for the stock. Data centers had become a faster growing segment in recent quarters. Other segments include automotive, original equipment manufacturing and its intellectual property. The company may face downward pressure on GPU prices, which could impact fourth-quarter earnings.
The stock is reasonably priced with a P/E ratio of 18.44, not bad for a momentum stock. The company also offers a token dividend of 0.50%, which makes the stock a portfolio choice for equity money managers who only buy stocks that offer a dividend.
Remember that demand for semiconductors is an important economic indicator as almost every electronic product we buy contains computer chips – from your smallest handheld device to the automobile you drive.
The Daily Chart for Nvidia
Courtesy of MetaStock Xenith
The daily chart shows that Nvidia began 2018 with continued strong upside momentum which stalled on a dime after setting its all-time intraday high of $292.76 set on Oct. 2. As the stock began its bear market slide a “death cross” formed on Nov. 13. A “death cross” occurs when the 50-day simple moving average falls below the 200-day simple moving average and indicates that lower prices lie ahead. The stock traded back and forth around the center horizontal line which is my semiannual pivot at $212.29 between Oct. 24 and Nov. 7 as the moving averages were converging. On Nov. 15, the company missed analysts’ estimates and the stock gapped lower on Nov. 16. This provided the negative catalyst for the decline to the 2018 low of $124.50 set on Dec. 24. My weekly value level is at the base of the chart at $123.19.
The Weekly Chart for Nvidia
Courtesy of MetaStock Xenith
The weekly chart for Nvidia is negative but oversold with the stock below its five-week modified moving average of $161.09 and approaching its 200-week simple moving average or “reversion to the mean” at $118.60, which is a buy level. The 12x3x3 weekly slow stochastic reading is projected to end this week slipping to 9.11 down from 11.41 on Dec. 21. The stock is not only below the oversold threshold of 20.00 but it’s also below 10.00, which I describe as a stock “too cheap to ignore”. The horizontal lines are the Fibonacci Retracement levels of the huge rally from February 2016. The 61.8% retracement at $126.80 held at the recent low.
Given these charts and analysis, my trading strategy is to buy weakness to the “reversion to the mean” at $118.60 and to my annual value level at $115.61. Reduce holdings on strength to my semiannual pivot of $212.29.