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NVIDIA is topic of conversation

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In the last couple of hours, my e-mail has been filling with questions regarding NVIDIA (NASDAQ:NVDA) $35.69 +17.5% as the stock rallies after news that the company's current CEO is taking a leave of absence and the company restated previously reported earnings.

Back on April 1st, we alerted bears that the stock had achieved its bearish vertical count. For about a week after than time, the stock traded sideways until finally breaking down further. Here's a bar chart of the technicals as I see it and I'd be looking for resistance near current levels or higher at/near the $42 level.

NVIDIA Chart - Daily Interval

With retracement set from the 10/02/01 lows to recent December highs, conventional retracement had the stock looking vulnerable into Friday's close. However, this morning's surprise announcement that restated earnings would actually be a "positive" restatement to earnings has bears locking in some handsome gains.

In past updates, I've shown the regression tool on the chart of NIVIDIA (NVDA). On Friday, NVDA came very close to the lower end of this downward channel (2 standard deviations) and the stock has now recouped 1/2 of the channel to its mid-point. With heavy volume and obvious buying interest, I think a bear should be assessing risk to the $42 level. A "new bear" to the stock may be looking short/put here, but the understanding (based on regression) is that he/she is looking at a 50/50 trade. Conversely, a bear looking for entry near the $42 level is then using both the upper end of regression and the 61.8% as a level of resistance to leverage off of. Over the next week or so, the 50-day moving average (currently at $46.79) as another key moving average to short from.

Personally, I DON'T like a bearish trade in NVDA with risk/reward to difficult to ascertain.

While the "upward" revision to past estimates may be viewed as a "positive," a company without its CEO is also viewed as a ship without a captain.

While I'd be more "bearish" on NVDA than "bullish" at current levels, I just think entry for a trade is not that good at current levels. There's undoubtedly a lot of shorts wishing they'd covered near $30 and the lower part of regression and they may continue to do so in coming session. Should some covering continue to the $42 level, then risk/reward for a bearish trade becomes more favorable.

There may be some more lucrative bearish trades near-term.

One stock I'd have on a bearish trader's list is shares of CIENA Corporation (NASDAQ:CIEN) $7.11 -5.3% on a trade at $7.00. With "fitted retracement" and regression overlaid, a bearish trader can identify a clear target of/near $3.86. The point and figure chart is currently bearish with a price objective of $0.50.

CIENA Corporation Chart - Daily Interval

Lately, we've seen some nice moves lower in stocks breaking to new 52-week lows as bulls "capitulate" and toss in the towel. The point and figure chart of CIEN hints at $0.50 as a bearish vertical count. A trade at $7.00 would be a triple-bottom sell signal. A trade at $7.00 would also be a break of fitted retracement and gives an identifiable near-term target of mid- regression and perhaps 19.1% retracement of $3.86.

Earlier today in the market monitor, I thought longer-term bears might want to take a look at the January $7.50 puts should the stock trade the $7.00 level. This type of trade would have the trader risking about $2.20, which is equivalent to a short in the stock at $7.00, if a stop were used above 50% retracement of $8.99. The "kicker" in the trade longer-term is the potential that Ciena (CIEN) becomes a "tax loss sell" candidate into the end of the year. Tax loss selling can take place in stocks that become "losers" in a trader/investor's account, where they will sell the stock to generate a realized loss to offset other gains.

For example... an investor/trader holding/trading HMO stocks may have gains to offset in some networking stocks they've been holding/trading since the beginning of the year (big grins abound).

Jeff Bailey
Senior Market Technician
Option Investor

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