Nvidia's Stock Is On The Verge Of A Big Run Higher
Summary
- Nvidia's stock is nearing a big breakout.
- The options are also implying the stock will rise.
- There may be some improving fundamentals to this story.
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Nvidia's (NASDAQ:NVDA) stock may be about to surge to even higher prices over the coming weeks. The technical chart suggests Nvidia is breaking out and may rise by to as high as $178. The options are bullish too and indicate the stock will increase over the near term.
The last time I wrote on Nvidia was on May 17. At the time, I had noted that the stock was likely to drop to $150 from its then price of $160. The stock ended up falling to a low of $133 on June 3. You can now track all of my articles on Nvidia and Seeking Alpha on this Google Spreadsheet I created.
Trending Higher
Nvidia's shares are now trending higher in a rising channel and challenging resistance at $160. Should the stock manage to rise above resistance, the stock could go on to rise to around $178, an increase of almost 12%.
Additionally, the relative strength index is also rising and has broken a downtrend. It suggests that bullish momentum is entering the stock — the RSI is currently around 60, still well below overbought levels at 70.
Bullish Options
The options for expiration on July 19 suggest the stock will rise or fall by as much as 8% from the $160 strike price by expiration. It places the stock in a trading range of $147.75 to $172.25. The implied volatility for the options is currently around 38%, that is nearly three times higher than the SPDR S&P 500 ETF's (SPY) implied volatility of 14% - a proxy for the S&P 500. That means traders believe that Nvidia is in a period of heightened volatility.
In what may be a bullish sign, the number of calls at the $160 strike price outweighs the puts by almost 3 to 1, with roughly 5,700 open calls to just 2,000 open puts. For a buyer of the long straddle options strategy to earn a profit, the stock would need to rise above $172.25 or fall below $147.75. However, given the number of calls, the options suggest the equity may increase.
Fundamental Underpinnings
One reason it may be time to get optimistic on the equity is that the price of Nvidia's GPUs have stabilized in recent months after a steep decline in January. I had noted in an article from January that the cost of the GeForce GTX RTX 2080 Ti Founder's Editions had fallen to $1,400 from $1,800. However, since that time, the GPU has stabilized and is now selling for around $1,320, according to the website camelcamelcamel.com.
The Nvidia GeForce GTX 1070 Founder's Edition had reached a price of $399 in January, as I noted in the previous article. However, since that time, the cost of the GPU has risen to around $500.
Perhaps this would suggest that demand for Nvidia chips is rising, or that the supply is falling. It is more likely; however, that supply is falling. The company had previously noted high inventory levels in the channel on its fiscal first-quarter conference call. It could very well be the case that inventories are or have corrected, thus the price stabilization.
RISKS
Should the stock fail to break out and rise above resistance at $160, Nvidia has a heightened risk of falling back to $150, its next level of support. However, if momentum turns sour, the stock could fall to as far as $139.
Additionally, the semiconductor stocks have been susceptible to developments on the trade war between the US and China. Should the G20 summit and talks with China not progress well, it could result in the sector falling sharply.
Should the stock break out as the chart and options suggest, the stock could have some real room to run higher. There may even be some fundamental underpinning as to why we have seen such a change in sentiment.
The focus of Reading the Markets is to find stocks that may rise or fall using fundamental, technical, and options market analysis. Additionally, we search for clues from the broader markets to discover trends and gauge direction.
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-Mike
This article was written by
I am Michael Kramer, the founder of Mott Capital Management and creator of Reading The Markets, an SA Marketplace service. I focus on long-only macro themes and trends, look for long-term thematic growth investments, and use options data to find unusual activity.
I use my over 25 years of experience as a buy-side trader, analyst, and portfolio manager, to explain the twists and turns of the stock market and where it may be heading next. Additionally, I use data from top vendors to formulate my analysis, including sell-side analyst estimates and research, newsfeeds, in-depth options data, and gamma levels.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: Mott Capital Management, LLC is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Past performance is not indicative of future results.