Has the Nvidia rocket finally flared out?

Dear Trading Diary: I had another good but pivotal week with Crude oil advancing. Currencies were quiet, Of what should be major significance (but under the MSM radar), Thursday was on the Summer Solstice when markets can often set important tops/bottoms. I put out a couple of small Nasdaq shorts to test that thesis.

And my following analysis is the reason why:

Putting the recent Nvidia share performance into perspective, here is the long term weekly chart

That is some Hockey Stick! Recall I made a similar observation in Cocoa recently.

For many years prior to around 2021 it was just another manufacturer of gaming chips making little money with the shares trading in the cents. But with the AI phenomenon kicking off, after a savage dip from $35 to $12 in late 2022, the shares embarked on the most amazing rocket launch I have ever witnessed in hindsight (in a non-meme share). Back then, Artificial Intelligence was just a gleam in the eye of developers.

But as the whole AI story that gathered momentum in 2023, it came to dominate the entire market, The shares have rocketed up from $15 in December 2022 to last week’s $140 – a stunning gain of 833% in only 18 months. It has come to be the leader of the Nasdaq – and the general US markets. And hence a barometer of all major US indexes

Just take a second to stare at this chart. With all the experience you have of looking at share charts, do you believe it likely that the rocket will reach the moon – and beyond (as so many believers say)? No, neither do I. Share prices always move in waves up and then down (and then up and so on).

That is why I have been looking for clear technical signs the oxygen was running out so that I could pinpoint a major reversal. If I could do that, then I could with high confidence forecast the major Nasdaq reversal I have been anticipating for some time (irony alert!). And I believe I have found just the clearest indications yet of that reversal.

I have been dipping in and out of long index positions picking up a few pennies to add to my war chest for when my major bear campaigns kick off in earnest. But now I am poised ready for the big one with fingers hovering over the Sell button. I know I am sticking my neck out here – and against massive consensus – but I believe my evidence is strongly in my favour.

Did Nvidia top out very conveniently on the Summer Solstice?

Nvidia has been the talk of the town for weeks/months and has been in a near vertical climb reaching the astonishing $3 Trillion valuation. And on Thursday – the precise date of the Solstice – it made a new high of $140 – and then fell back to under $130 in just four hours in a rare strong down day.

And bang on the solstice on Thursday, the shares pushed up to a new record high of $140 and then fell hard into the close forming a daily key reversal (a new high and a low below Wednesday’s low). Then on Friday it edged lower and closed below the $130 mark and that formed a bearish red weekly candle on the chart marking a weekly ‘key reversal‘. These very often appear at the end of major trends.

The leg up from the April low has been near-vertical (when viewed on the daily and weekly charts) and a clear sign of an extreme mania – but note the huge mom div here going into the Summer Solstice. This period is surely a buying climax.

But if this is The Top, the Nasdaq will surely follow. The bulls argue that Nvidia’s high share price just reflects the ballooning company earnings with blockbuster results reported every recent quarter. So why would shares start a bear trend? Good point.

For one thing, the latest P/E ratio is around 80 – a figure that many view as rich. I recall many dotcom issues in the late 1990s had valuations around that extreme figure – at the tops before the great Nasdaq Crash in 2001.

For another thing, with services PMIs preventing the Fed from cutting rates soon, they may stay higher for longer – and impact bullish tech sentiment negatively as investors lose patience. Or maybe something out of left field will appear. And remember, it is the news that follows the markets. That is why tops are generally made when there are few negatives in the news. When a share has fallen some distance, that is when some ‘bad’ news emerges. By then, you have missed your best opportunity.

Some may view my reference to the Summer Solstice as a valid technical indicator as somewhat whacky. But remember, it is our sun that drives activity on earth. Of course without it we would not be here at all. And the solstice is when the sun is at its highest and the length of day is longest (in Northern Hemisphere). From here, days grow shorter, the sun drops in the sky and nature’s growth reverses. It is when nature is at its most optimistic. So why not the same for extremely vigorous emotional markets that move in cycles?

My bottom line on Nvidia and US stocks: I view my above analysis as solid grounds to be reasonably confident I have found The Top in Nvidia on the Solstice and also in the Nasdaq. I have a couple of small short Nasdaq positions on the books with reasonably close stops in case I am too early (again!). But with latest data showing the Nasdaq Composite (not the Nasdaq 100) with 157 more new 12-month lows than highs, upside momentum is clearly flagging (as it has for weeks).

Also, the short interest in S&P shares has reached a record low only matched by that at the 2001 low of 1.7% when indexes topped out and started a major collapse. And this recent headline: “Short sellers fear extinction in the face of the relentless rally” And hedge funds that sell short are closing in droves from lack of new investments and large redemptions.

If this is not a time for a classic major contrarian stance, I do not know what is. My ducks are nicely lining up in a row.

And I am re-loading up on my favourite vehicle for my Investment account that I relay to my Pro Shares members.

It is the narrowing band of Big Tech that has kept the Nasdaq uptrend alive and when they start to turn around, we will see an avalanche of new lows vs new highs – and a massive collapse in the index(es). By getting in early, we stand to make life-changing returns on our short-selling campaigns.

And for investors in Big Tech, this is a great time to start thinking about taking out some of your profits. But don’t wait too long!

Recommendations: If you are interested in manias and what drives them, look no further than the classic “Extraordinary Popular Delusions and the Madness of Crowds” by Charles Mackay (1841). It is written in rather archaic language of its time but it really captures how the madness of crowds can coalesce at certain times to form a mania. But few realise they are in a mania at the time! It all seems so normal to almost everyone! Yes, manias are truly mental.

I can’t help thinking the current Swiftie phenomenon could well be included in any updated new edition!

And as a textbook on pure financial speculation, it is hard to beat another classic “”Reminiscences of a Stock Operator” by Edwin Lefevre (alias Jesse Livermore) of 1923. He operated in the age of ‘reading the tape’, stock ticker machines and brokers’ offices dotted around the nation a hundred years ago. What is most interesting to me is his self-analysis of how he developed his trading style from his early years and youthful failures to his mature graduation after paying several tuitions (aka major losses) in the university of markets.

Indeed, learning how to speculate involves a sometimes lengthy investment of time and study in the lessons which the markets demand of us. And most of these lessons are in your own psychology, not so much in technical trading.

Update on my Gold/Silver campaigns; Both suffered major pull-backs on Friday which has changed my immediate bullish stance. My BE stops have not been hit yet.

I note that the latest COT data shows Gold positions by hedge funds are now 7/1 long/short. That is pretty much an extreme and so large pull-backs are to be expected. But both remain in what I view to be incomplete wave 3 of 3 up and if stopped out of current positions (at Break Even), I will be looking for new low risk re-entries. A possibility remains that the current pullback could stretch much deeper especially if the dollar remains firm in light of the probable Fed delay to rate cuts.

But the weeks leading into the US elections in November will be fertile ground for heightened volatility – and a likely surge in the VIX Fear Index that is already showing signs of a major turnaround that would align nicely with a stock index reversal. I’m starting to get excited with possibilities!