Finally Nvidia had a trend reversal trade signal last Thursday, a day before the triple witching day on Friday.  Nvidia had a fabulous run since its earnings report in last May.  The final top came after the stock split event and XLK quarter end re-balancing.  The market is sending us a message that Nvidia buyers are exhausted at the moment.

In order to qualify for a trend reversal trade, there are four conditions that have to met:

  1. Existing extended bullish trend.  Nvidia has been rallying since October 2022.  The origin of the bull market started in October 2022 when the market sniffed out the impact of the Fed rate hiking cycle.  The Fed stopped raising rates in July 2023, the stock market bottomed in October 2022 because of the discounting mechanism.
  2. A holiday break.  Wednesday was a stock market holiday.  Whoever shorted Nvidia stock was not having a good day off.  So when the stock market opened on Thursday, the shorts gave up and threw the towel.  That’s why Nvidia had a gap to a new high on Thursday morning.  The shorts couldn’t take it anymore and did whatever to close the short trade.
  3. By 10:10 am Thursday morning, Nvidia stock started to experience serious selling.  By 10:20 am, Nvidia produced a hard sell signal.  In a bullish momentum stock like Nvidia, it’s very rare to find a hard sell signal.
  4. The normal dip buyers showed up at the 10:20am low, but was not able to push it to the other side to nullify the sell signal.  By 11:45am, the sellers pushed hard again and Nvidia closed near the low of the day.

A similar trend reversal trade took place on March 08, 2024.  Nvidia corrected from March 08 to April 19 for 22% measured from high(97.40) to low(75.61).

Will this June 20 high lead a similar 22% correction? It all depends on how the general market does.

The entire market is under Nvidia’s grip.  As long as Nvidia remains bullish, the NASAQ and S&P 500 will stay bullish.  Even so, Nvidia stock is still bound to the law of valuation and macro events.  Cisco and Qualcomm were good examples of the last DOTCOM bubble.  A great company like Nvidia may not be the best stock to own in the future because the present value could have reflected everything the future might bring.  The second stage of AI rally is in software stocks.  Some of the AI software winners could be the names that we have never heard before.  After the DOTCOM bubble, the tech sector didn’t start to outperform until after the financial crisis low in March 2009.  This time could be different.  The arrival of revenue producing AI software companies could be very fast.  Plus we don’t have a bubble in the financial markets right now.  So as soon as the current 4-year cycle finishes, the AI software shining stars could be leading the market instead of Nvidia.  Nvidia is a hardware company.  It’s very hard for a hardware company to lead the market perpetually.

Right now, Nvidia stock need to decline 20% to meet its 50-day moving average, and 45% to meet its 200-day moving average.  This just shows how rich Nvidia stock is.

We think Biden will lose the election, but Biden will definitely try very hard to keep the stock market picture rosy into November.  If the stock market follows its election year pattern, we shall get a summer correction and then a rally into year end.

Seasonally, the first half of July is bullish.  Since we already have a short term top in place, the market could be trading sideways around this short term top during the first half of July.

It would be a good thing to get a sizable summer correction, which will give room to rally into the November election.  This short term top in Nvidia certainly sets up a correction for summer.

There are lots of cross currents in election year.  Really hard to predict a year-end rally at this point. What if the stock market crashes from the summer high into November because the market sniffs out Biden losing to Trump.  This is a possibility.

Below is the S&P 500 weekly chart.

It is 9 weeks into the current weekly cycle.  It exceeded the upper channel line a little bit.  It will fall below the upper channel line in the next few weeks.  There is no point of buying anything at the moment.  The rally from the April 19 low was completely due to Apple, Microsoft and Nvidia.  No broad participation at all.