NVIDIA (NVDA) - Feb 16th 2024
An honest self-review of the SMCI capitulation drop and how I could've participated
Bigger picture context
On Friday the 16th SMCI finally capitulated and dropped 200pts. I'm sure reviewing that trade would get us a lot of views. Yet truth is I did not participate in the short at all.
I watched every second of the move happen live and it never offered an entry that aligned with my system.
Do I feel FOMO? Not at all.
Should've I jumped in anyways? No. Absolutely not. Two years ago I had an extremely rough year. A huge part of that was due to my trading system from back then completely falling apart. I've worked very hard to study, build and learn a system that aligns with my goals and personality, and I have no intention of disrespecting all that work.
Should catalog the trade and add it to my playbook? Absolutely! I've already spent some time with the chart and replaying the action. There were some reasons to get involved and I could've probably caught part of the pie if I was focusing on that name exclusively. But I wasn't.
Instead I was looking for NVDA to break out of its consolidation and lead us higher. I want to go over my original trade idea, and how I could've used NVDA as a vehicle to profit off the SMCI drop.
Weekly chart
We're all familiar with this weekly chart by now, no point going into too much detail as there's not much to say despite the obvious. Stock is up over 45% since the $500 breakout and shows no signs of stopping. It might be worth noting it has earnings next week.
Daily chart
I'm not sure I'd argue the momentum is slowing down by looking at this daily chart. Higher lows are being put in as the stock consolidates around all-time highs, potentially getting ready for a move higher. Notice how price gapped down on a hot CPI print a few days ago, but buyers immediately picked it up and managed to put in a pretty solid green day, showcasing their strength.
This last red inside daily bar may give us a trade to either side, although I'd rather take longs while the trend remains bullish.
Hourly chart
Price is ranging as we already saw on the daily chart. We have two strong levels at $741 and $738.49 which are near the inside daily buy trigger level and may become strong candidates for a long trade entry. Once again, not too interested in the downside just yet.
Pre-market action
This is what caught my attention and made this name my main watch for the day. Despite being OPEX and a Friday ahead of a long weekend, NVDA was set to open above our daily buy trigger after consolidating for a few days and nearing all-time highs. Furthermore, a bunch of upgrades came in that morning.
The trade
This is what my CPT looked like into the open:
Cue(s)
Market leading stock in strongest sector
Well rested after much-needed multi-day consolidation
Bulls have consistently demonstrated strength all week
Gapping over an inside red day despite SPY down on PPI print
Higher lows on the hourly (ascending triangle)
Tons of upgrades just came in
Plan
The plan was to watch for bounces at $738.50s and look for longs as soon as the open was reclaimed. Add on the $741 break and hold unless the $741 broke back down.
Trigger
Bounce and reclaim of the opening print.
2m chart
While we were not really expecting that initial drop, there was a nice bounce play that one could scalp for a decent profit.
As the stock created a new high of day the tape was getting heavy and price started losing momentum. I decided to take my gains and step aside, waiting for further action.
The $741 level, conveniently aligned with the opening print, starts rejecting, which again is something we weren't really expecting. More reasons to sit out and watch.
Price puts in a nice bullish reversal bar setting up a potential higher low at the $738.49 which certainly looks like it could lead to our second leg up into new daily highs. But this buy setup fails on the next bar. Again, another clue.
At this point, if you peeked at SMCI chart, it was starting to fade... Interestingly though, NVDA failed before SMCI.
Here's where I think I could've done better. I was happy with my long scalp and decided to sit back and watch the SMCI drop.
Of course at that time I didn't know SMCI would never offer an entry. But NVDA did! That failed buy right at a level offered a clean entry to the downside that would be instantly fuelled by the SMCI drop and allowed anyone to profit off it while trading with a defined risk, healthier premiums, and a more liquid underlying stock.
The trade was effortless as SMCI was capitulating and it dragged down not only the semiconductor stocks but pretty much the whole market. NVDA was the stock I was watching, but there were many other names you could've used to capitalize on the drop.
Both NVDA and SMCI hit their respective downside levels at the same time, so you could take partial profits right at the level for a 6R trade and leave the rest in case there was no bounce (there was).
Closing notes
Sure, the NVDA drop may not have been as sexy. And we all know the premiums on SMCI made life-changing moves. But that's not the point.
The point is about finding a trading vehicle that allows you to profit off events like this while keeping your risk in check. Someone with a small account couldn't afford to trade SMCI's 0dte options without assuming a massive risk. Of course, now that we know how it played out it's very easy to say you could've 10x'ed your account. But at what cost? Those premiums were not cheap and had huge spreads. A 10pt bounce (20% of an ATR) and you'd be cooked before even thinking of getting out.
This whole SMCI story is far from done. Remain calm and alert, as there will be plenty of opportunities to get involved moving forward.
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