NVDA is off over 7% today, headed back to the lower end of its range.
The stock has been one of the largest movers over the past two years, so should we look to buy the dip or just let it collapse back down to 50? Let's take a look.
The "Why" Behind The Move
Relative to the past month's volatility, NVDA saw a 4 standard deviation move.
That's pretty big.
Normally when you see a move like this, it's related to a fundamental shift in the company. Earnings or guidance.
But the news today?
Here's the thing... big moves related to analyst coverage stink. They have a much higher odds of reversion.
So until we see the actual company coming out with some fundamental catalyst, this has the chance for a bounce.
What Are The Odds?
Going back over the past year, the stock has a tendency to drop 10-15% during a 10 day timeframe.
In a one-month window, we're looking at about an 18% drop.
Now let's take the most recent swing highs at 110.
A 10% cut from that is about 99 per share.
And an 18% cut is about 90 per share.
Assuming normal volatility, dropping into the low 90's should be a floor. Earnings is coming up but that is a risk you'll need to consider.
The Obvious Support
When using technical analysis, I ask myself two questions:
- Who are the market participants?
- Where will they get screwed?
NVDA is a momentum darling and has plenty of high-risk individuals looking for upside. The fact that it was so sensitive on this analyst downgrade tells me that those momentum players are probably using too much size and are getting impatient.
Now there's a very clear level right at 95, the support level from February.
Think about how many traders are using it as their stop loss level.
We know that the statistical odds put a "stretch" target in the low 90's, and if we clear 95 we'll probably see a bit of a stop run.
Into that is where I want to look for a trade.
Take The Trade
A good strategy here is a put credit spread. This is a limited risk, limited reward trade that profits if the stock goes higher or sideways for a while.
With credit spreads, you can be Proactive and anticipate price levels, plan your trade, and use GTC LMT orders so you can walk away from the screens.
The May 85/80 Put Credit Spread currently has a price of 0.45, but if NVDA heads to 93, then it will be at 1.00.
So you can put a limit order to sell that spread at 1.00, and you become a tiny market maker, providing liquidity to the markets.
There is earnings risk with this trade, so if you need a little more safety you can look to the May 80/75 put credit spread.
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