Bulkowski's Nvidia Trade

Written and copyright © 2011 by Thomas N. Bulkowski. All rights reserved.

Nvidia Trade: High and Tight Flag

Not every trade I make is a winning one and this is an example. I show Nvidia (NVDA) on the daily chart.

I saw a high and tight flag (HTF) forming in Nvidia. A HTF occurs when price doubles in less than two months. That happens starting at A and rising up to B. The flag portion usually isn't a flag at all, but in this case, it is (C).

I waited for price to close above the top of the flag/flagpole before buying the stock at the location shown on the chart.

I checked the industry strength (of the 20 stocks in the industry, between 14 and 19 were up over 1 to 6 months before the buy), the stock was up and so was the market over the same 1 to 6 month period.

Noise for the stock was low, at 30% over 1 month and rising to 43% over six months, with strong strength relative to the S&P 500 index. That meant the stock was outperforming the general market.

Volume was not consistently rising over the prior 3 weeks, suggesting an increased chance of failure, a hint that I ignored.

A volatility stop of 15% below the current price was too far below the buy price to be useful. I snuck the stop below the flag low, shown by the dashed line, at 21.73. On the up side, I was looking for a 50% move, to 36.

The stock scored +2, suggesting a higher probability of reaching the median rise price target of 31.07.

Earnings were due February 11, just outside of the 2 week window. On January 25, I received a fill at 24.23.

Nvidia Trade: Into The Trade

As the stock moved higher and then seesawed up and down, I listened to the reports that said the stock was a sell, that traders should take profits. I hoped that they were wrong, but traders listening to those voices heard what they wanted to hear.

Instead of resuming the move upward, the stock collapsed and hit my stop at 21.73 on March 1, for a loss of 10.5%.

Here's what I wrote about the sell reason: "Stopped out at 21.73. I checked in the morning and the stock was up, so instead of closing out the trade for a small loss, I decided to let it ride. The market reversed and near the close, it hit my stop, dropping 4.4% in one day and expanding the loss. Ouch. I had a feeling this one wouldn't work out... Maybe I should have taken the AADT confirmed, as a warning."

The AADT is an Adam & Adam double top chart pattern shown at D and E, confirmed when price closed below the valley between the two peaks, F, later that month.

-- Thomas Bulkowski

Written and copyright © 2011 by Thomas N. Bulkowski. All rights reserved. Forecast: A prediction of the future, based on the past, for which the forecaster demands payment in the present.