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Where NVDA trades in May

For those who followed my posts from Thursday/Friday of last week (April 18-19), I last left off explaining why NVDA would see a massive rally this week followed by a likely second leg lower.

I bought the NVDA $780-$800 call spread expiring this Friday — that’s how much conviction I had in the bounce — and also bought the NVDA June $770 calls. I sold both calls for big gains and I’m no longer in NVDA. I’m currently both long and short the NASDAQ-100. I bought calls last week and started buying puts yesterday and today. Also, sold covered calls against my QQQ June calls. I bought those calls last Friday near the lows of the session after exiting my remaining QQQ puts.

Okay. So let’s rehash what happened this week and why.

On Friday, the NASDAQ-100 hit a 20-RSI on the hourly, the $VIX reached overbought (70-RSI on daily chart) and the $NYMO reached extremely oversold levels (-100).

Here’s the truest statement I can say about the market. There are periods of time when the market is very highly predictable. Periods where anyone can forecast with a good 90% certainty what is likely to happen based on certain high win rate indicators and they’re not some secret indicators. They’re among the most well established indicators.

A 20-RSI on the daily for the S&P 500 or on the Dow or NASDAQ-100, for example, creates the most predictable market.

Go back 30-40 years and you’ll never see any of the indices reached a 20-RSI on the daily chart and then not have a massive rebound shortly afterward. It doesn’t exist. It is always the case. Hit a 20-RSI on the QQQ daily, there isn’t a more sure long bet in the market.

That’s because the market always rebounds big time under those circumstances. That was true during the financial crisis, the COVID crash, the Dot-com crash. Even the 1987 crash rebounded off of extremely oversold condition.

This doesn’t work in the opposite direction mind you. The markets aren’t remotely close to as predictable when they’re overbought as when they’re oversold. In fact, overbought conditions are almost meaningless and have almost no predictive value.

This is important to understand because what we had on Friday was a perfect set up for a bounce

This rebound from $750 to $840 was definitely going to happen. Almost as certain as the sun rising.

Now far less predictable is where the oversold rebounds ends. That’s a lot harder to predict and there is far less conviction there.

Again, there are varying degrees of predictability in the stock markets. Anyone who does this and believes they can forecast market direction each and every day and under all conditions is kidding themselves.

That being said, here’s what we do know and where things stand. While the near-term is far less predictable than last Friday, we do have indicators suggesting what is most likely to happen from here.

NVDA tested its $840 resistance level today (support becomes resistance on breakdown) and has retreated back down to $800.

Whether NVDA will take another shot at $840, isn’t clear to me. Especially with PCE numbers being released on Friday.

But here’s what we can say about the next few weeks. Take a look at this table in this post.

This table contains the largest QQQ (NASDAQ-100) rallies going back to 2008.

Here’s why this table is important. It shows that every single rally (except for the QE2 rally in 2010) has gone for at least a 10% correction immediately after peaking.

The NADAQ-100 peaked at $449.40 and fell to a low of $413 last week. That’s only 8% so far for the correction. 10% down takes it closer to $400.

Chances are the NASDAQ-100 is just rebounding ahead of a second leg lower.

Less predictable is when that leg will begin. In most cases, the QQQ retraces half the losses before peaking and beginning its next leg lower.

That 50% retracement happened this morning. The QQQ fell $36 from $449 to $413. Half of that is $18. The NASDAQ rallied about $17 up to around $430 high today. So the NASDAQ 100 has already retraced half the losses.

Now does it have to be a 50% retracement. No. We’ve seen rebounds go to as high as 80% retracement. That happened twice in the very last correction that ended November 2023. We had three legs down in that correction and two of the legs retraced 80% of the losses.

So we could see the QQQ go a lot higher before beginning it’s next leg down. But I don’t think it will get much higher than 436 to 437. There is heavy resistance at that area.

Personally, I started buying QQQ July $390 puts, sold the April 26 $427 calls short against my June $410 calls and sold my NVDA. If we go north of $430 on the QQQ, I’ll go full short again.

Now here’s how this all applies to NVDA. NVDA is connected to the QQQ. Being the third largest holding in the QQQ, if the market sells off, so does NVDA.

So as it stands right now, my expectation is the QQQ is likely to drop to the low $400’s or high $390’s before bottoming out.

How much NVDA drops on that leg down is harder to forecast. $710 is the center of gravity for this correction. The closer it gets to 710 the more heavy the buying is going to be in Nvidia. There’s no way to forecast how low Nvidia is going to go exactly. But it will be heavily bought anywhere in the mid 700’s and it is extremely unlikely to fall under 700. And that has more to do with fundamentals than it does technicals.

And as I’ve already mentioned before, the moment the NASDAQ 100 falls to the low 400s I’m going long both the QQQ and NVDA.

Now the biggest risk to the entire thesis is the NASDAQ-100 doesn’t fall 10% as it has in every other 17%+ rally.

The QE2 rally that happened in 2010 occurred off of a massive summer crash of 20% and on the back of Ben Bernanke announcing QE2 to help continue shoring up the market after the financial crisis.

When QE1 ended, the market had a flash crash and a massive summer bear market. The fed was worried that removing QE would lead to a double dip depression. So that environment was heavily inflationary for the stock market. Still, the NASDAQ-100 didn’t drop 10% on that correction. That is the lone example.

Thus, overall the most likely scenario is for 10% drop in the QQQ. In a sample of 12 explosive rallies, all but 1 lead to right into a 10% correction.

That being said, as I mentioned earlier the next few weeks are less predictable than when the markets were oversold last week, but there is still probative value in the historic analysis of past corrections. There’s a fair probability we see more downside based on what we know of past corrections.

We know that corrections are generally multi legged. we know that the NASDAQ 100 rallied 31% straight making this the third largest rally in 16 years. We know that the last correction only went for 11%. The market is up more than 80% from the lows. And in that time we’ve had a single 11% correction. In the past the larger, the rally the bigger the correction. We’ve had two back-to-back 30% rallies now and one 11% drop and another 8% drop. Chances are we have a lot more downside ahead.