The gap up this morning from their “blockbuster” earnings was not the biggest move in the last 10 days. In fact it wasn’t even the 2nd biggest. Or the 3rd biggest. From the action today, it appears to have been a disappointment to traders.
I just noticed something. Looking at a 10 day chart, NVDA has had a way of gapping up then filling the gap downward. 7/25, 7/27, 8/7, 8/15-16, 8/22, and today 8/24. I should have looked at this earlier and been more ready today.
I’m seeing this chart suggesting that NVDA gaps up, drifts down and sideways to fill the gap. We can expect NVDA to run sideways for a week?
I still “see” a gap from $471 to $474. Do you see that gap, too?
There’s also a gap a few days ago 435-441 ish?
Thanks for the discussion!
Hi Ralph and Derek,
When you say that you can see a Gap rfom pirce X to y, what does that mean? Are those the limit orders still waiting to fill? Can you show that on the chart you inserted, thanks
Here’s an explanation of gaps.
Look at a chart, note the time frame.
I look at daily, sometimes weekly or monthly.
A gap on a daily chart (for me) means the stock price “gapped up or down” from the close one day to the open the next day.
See the chart in Derek’s post.
See the chart I posted. Do you see the gaps?
The TA meme is that “Gaps always fill”.
But, it can take a while.
A gap below the current price is said to “pull down on the price, preventing it from rising”.
Other people say TA is BS. And poo poo “gaps”.
TA is a tool. I use FA to choose a company, then TA to decide if now is a good time to invest in that company.
NVDA basically finished unchanged. They also traded down below yesterday’s close in after-hours. I’m counting that as “gap filled.”
Thanks so much Ralph and Derek…this is very helpful.
Just a few more bits about gaps. As Ralph already said, most people feel that all gaps will eventually fill. It’s almost like the gap attracts the stock price like a magnet. Of course this is not always true. I’m sure there was a time early in Amazon’s existence where they surprised everyone and gapped up and never went back down. AMZN has had many splits early in their life, and I really doubt that they are going to trade down to $2 in order to fill a past gap.
But one thing about gaps that are important is that within them you end up with prices where there are little or no trades in past history. This effects the degree to which you can find support or resistance. When NVDA gapped up today to a new all time high it skipped a lot of prices. When you look at a price chart, there is a lot of air in the gap where you cannot see anyone else who bought at that price. When NVDA traded down today and entered the gap, there was a good chance that there would be no support that would prevent it from moving further down. Support and resistance is caused by traders who view a certain price level as being significant somehow based on what they have seen in the past. But if there is a gap then it’s just air and no particular reason for traders to see any meaning for any specific price in the gap. This is equally true of gap downs.
Now, often you get gaps that are not lifetime highs or lows but in the middle of a stocks lifetime range. Even so, there is less support and resistance inside the gap because often there are less recent trades within the gap.
Thanks…also, while you are here…had another question which always left me astonished…how does the price gap occur? Like, who decides that, after NVDA’s great ER report, the price jumps from 471 all the way to 494!!! I don’t think there was anything in between! And this happens universally for all stocks either when they go up or down post ER.
How does a price make its very first first move from 471 to 491
Or say a stock like ENPH drops 20% the moment the ER report comes out?
That’s a good question. The answer is that there actually is not really a gap. Usually the “gap” happens because people traded the stock up or down in after-hours and/or pre-market. I still think of the gaps as having less support and resistance because generally speaking what ever trades occur in extended hours trading are of much lower volume than during the regular trading day.
The tealeaves indicate there were lots of shorts hoping Nvidia would miss expectations. When they did well, shorts were forced to cover. After hours hit 501 and change. But apparently people decided to take profits. So price drifted down to the previous $475. That seems to imply people think the $475 is fair market value. They met expectations and exceeded them but that was anticipated in the $475 price. Still up nicely from the $425 two months ago.
Yes. As they say, the current stock price always reflects everything known about the stock at that time by everyone. If even a small number of people know for 100% certainty that the price will be X then they will buy or sell short the stock until the price reaches X to bank the guaranteed profit. It doesn’t matter what everyone else thinks. Of course, nobody is ever 100% certain, but the stock price is still based on the push and pull from everyone’s knowledge. Yes it is true that the majority of people have the most power, but on NVDA, the majority were absolutely sure it was going up and yet it went down. Those who went long right before the earnings report lost money (unless they took profits in after-hours). Probably a small number of large institutions took profits near the top, and this started the landslide as people got caught up in the selling frenzy and took profits. Those who anticipated this possibility and were prepared did pretty well.
Okay, so then the answer is yes, they went negative. Now the question is how negative will it go? Now I will disclose first that I am holding NVDA puts so I want it to go as negative as possible so make sure to consider my great bias.
I’m now thinking that it is not done going down. People are not going to be satisfied that profits were taken and they can now resume going up to follow their ever increasing estimates and projections. I believe that the gap that was left behind on 8/21 will be filled and that the 8/18 low and maybe even the 8/14 low could be challenged.
They say that when a stock is in movement and pauses in consolidation, it is likely to keep moving in the same direction and the consolidation will be about (not exactly) 50% of the overall move.The following chart shows NVDA from 8/18 to today. I circled the first two moves with consolidation about 50% of the way. The big circle is the current consolidation with the line showing about how low they could still go. I’m predicting a down move to around 430.
So then the only other thing I’m wondering is if eventually (not soon enough for any trades today) we may even take out the 5/25 80-pt gap that was left behind and never filled. That would be like 90 pts away and 170 pts to fill. The thing about that gap is that it is a very wide all-air gap. It was a gap up to a new all time high which means all the prices in the gap have no trades in the stock’s lifetime. There would be relatively little true support which means if it breaks down into the gap it will have a hard time not falling. I’ll be there if we get down to that level.
I’m looking at the ai spectrum of stocks and I’m wondering if there is a bigger risk to the downside. Many ai companies have pulled back after earnings which is what seems to have happened with nvidia. I’m stunned that nvidia retraced to the 458 range after doubling up on earnings and also projecting doubling up on the second half of the year from 13 billion in the first two quarters to 30 billion in the second half!!! Unbelievable in my estimation and worrisome…
Nvidia selling fits with the cautious mood of the market. People thing the growth potential is fully represented in current pricing. Traders decided to take profits.
Nvidia is best of the group but people still worry about it one way or another. How long can growth continue.
Cloud computing was the previous theme. Investors are cautious now that the growth rate has fallen to 25%.
Derek, you might just get something out of this one after all! I would not have guessed it would go so far down.
This is why I always say to traders to completely ignore fundamentals. Very often, stock prices in the near term (hours, days, weeks, and even months) simply do not follow what the fundamentals might say. Now, if you are planning to hold for years (decades), then all this 10-20% movement doesn’t really matter to you at all.
Here’s the thing. NVDA’s blowout earnings report was definitely predicted ahead of time by many analysts. Almost all were saying that they will beat even the optimistic estimates everyone had. They were definitely going to gap up in everyone’s mind, and they had been saying this well before the earnings. And while they were throwing all these fundamentals at us, I went exactly the opposite and bought only puts on NVDA. Now, I chickened out at the last minute and bought some cheap quickly expiring calls just in case they pop up unbelievably high like everyone was saying, but I regret doing that now. Their gap up, even to 520 which doesn’t really count, was pretty small, and the usable up draft to around 500 was actually pretty tiny on a percentage basis, so my calls were definitely not profitable. Now I’m relying on my puts for all my profits and I need more than they have already gone down because post earnings, the options lost a lot of premium. It’s a good thing I anticipated a slower decline rather than an instant gap down and gave myself much longer expirations.
Now, why did I buy puts when all the experts were saying that this stock was going to the moon? Because I do not pay attention to earnings and revenue. In fact I don’t even care exactly what the company’s business is and whether or not they are good at what they do. Of course, I know this on NVDA because they are so huge and well known, but nothing fundamental about the company (financials or technicals) matters one bit to my trading. I bought the puts because I thought that the recent activity on this stock looked horrible. The following is the 60-minute NVDA chart right before earnings.
Some might say that it looks great. Approaching all time highs right before expected gangbusters earnings. Me, I thought the chart looked horrible.On the far left you see where NVDA gaps and hits an all time high (7/14) then proceeds to trade down sharply. Most of the rest of the chart is comprised of high volatility with often sharp moves up and down. Volatility is usually a bearish sign. On 8/22 one day short of earnings on the far right, they gap up and again hit an all time high, then yet again trade down sharply. So I’m thinking that the expectations are so high that it is actually likely that they could beat them and still get clobbered just like AAPL on 8/4, or if they clearly beat and gap up to a new all time high, they could still trade down sharply like they did the last two times.
In all of this analysis, I didn’t give one single thought to earnings or revenue which is often quite irrelevant to the price movement.
thanks for your thoughts and explanation on why you invested nvidia the way you did. Thats the hardest thing on using strangles is picking the stock. I am picking up that one can also invest into a strangle by first picking a stock and buying either the put or call, then when it makes a move buying the other option.
Actually, I believe that most stocks in general trade in a range over a two to three week time frame. Using that belief, I am trying to buy puts when a stock is close to the upper edge (puts are cheaper on a rising stock) and buying calls when the stock is close to the lower edge (calls are cheaper). If there is some hot news coming out and the stock I am interested in is in the middle of the range, then I am thinking that the strangle is a better option with the call and put out at the upper and lower strike for the trading range.
Thats what I did with GOOGL. It was trading around 130 with the range being 125 to 135 roughly. I anticipated it would move strongly either up or down with the nvidia results so I bought the Sep15 140 call and 117.5 put for a total investment of around 1.25 (82 cents on the put and 43 cents on the call). On the earnings news, I sold the call for a dollar even and now waiting to see if I can get well into the green with the put. Being new to these 2 part option trades, I’m still learning so thanks for your time to explain your analysis…doc
edit: the chart for googl i used
I guess I should also say this. When I say to ignore fundamentals, I am not saying to necessarily go against them. While the action often goes against the fundamentals, they also often go with them. In the extreme long term (decades) the stock price most often goes with the fundamentals. But in the short term, fundamentals generally have next to zero impact on your trades.