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The bulls are running. This trading rule is essential when everyone is making money.
All eyes have been on Nvidia lately, with its triple-digit profits and sales growth, triple-digit stock returns, and outsized stock market impact of late. So, a reversal in volume down from this week’s highs begs the question: How should traders handle their gains in Nvidia stock?
Nvidia (NVDA) is an AI leader that Joe Fahmy, portfolio manager at Zor Capital, has been focusing on for many months. He told Investor’s Business Daily’s “Investing with IBD” podcast that he’s “seeing continued bullish flows” from an options market perspective, reinforcing his conviction.
Audio version of the podcast episode
Balancing conviction with sales signals
“Spending on AI is still in its infancy,” Fahmy said. He agrees with estimates that Nvidia’s revenue could triple over the next three to four years, surpassing $250 billion.
But that doesn’t mean traders can’t reduce their positions. A few weeks ago, Nvidia shares triggered a profit-taking signal after rising more than 20% past a split-adjusted 97.40 buy point. It was the first early sign to consider cutting some — but not all — profits, but the stock continued to rise. As Nvidia extended further from its moving averages, the chances of a pullback increased.
Thursday’s downward trend reversal, while not amusing for shareholders, was not an unexpected move. After nearly doubling in three months, the leading AI stock deserves a break. Chances are it will take longer to cool down, but a strong rebound wouldn’t be out of the question either. Regardless, some traders may choose to use this near-term weakness as an opportunity to reduce their holdings of Nvidia shares.
Is this just a short-term spike, or is Nvidia stock due for a longer break? Only time will tell. This is why flexible sales signals are essential.
Selling Nvidia stock doesn’t mean getting out
Learning your selling rules doesn’t mean exiting your entire position in a stock, but learning how to take a profit when the opportunity presents itself, Fahmy says.
For investors with a longer-term time horizon, increasing stocks and waiting to reduce them when a stock rises above a key moving average like the 10-week line can be a wise strategy.
“I have a core position in (Nvidia stock) and I’m just adding to it at certain levels,” Fahmy said.
Fahmy also says that selling a stock doesn’t mean you can’t come back to it later. After reducing his position with a decisive breakout of the 10-week line in mid-April, he added to his position in Nvidia stock once the stock began to stabilize later in the month.
Learn to ignore FOMO
Fear of missing out, or FOMO, can also make it more difficult for traders to follow their selling rules. Fahmy says this is true even when traders hold a position in a leading stock like Nvidia stock.
The key is to realize that a winning position is indeed a winning position. “If you’ve made, say, 20 or 30% on a stock, there shouldn’t be any FOMO, because you’ve made money,” he added.
If Nvidia stock is a big winner, where do bull traders place their ultimate limit for exiting the market? For Fahmy, this level corresponds to the 200 day line.
This gives the stock plenty of room to run over a longer time horizon while ensuring you are on the right side of a stock’s overall trend. Maintaining your entire position at this level is not realistic, but this is where trading around a core position can be helpful.
Ultimately, determining how to trade Nvidia stock comes down to each trader’s time horizon and risk tolerance.
Market pauses as Nvidia slips; Two Titans near buy points
Nvidia stock split
Fahmy says he remains unfazed by the recent 10-for-1 stock split of Nvidia stock, which took place earlier this month. “I know this sounds like excessive stock splits,” Fahmy said. “I know a lot of people think stock splits are bullshit.”
“I think it’s an optimistic indication from the company that there’s still growth to come,” Fahmy said.
Nvidia stock had its 10-for-1 stock split on June 7. The split sparked a series of price hikes from analysts and helped push the stock comfortably beyond its profit zone.
Nvidia is currently ranked #1 in the Electronics-Semiconductors group according to IBD Research and holds a perfect Composite Rating of 99. Nvidia stock has gained more than 150% year to date.
Follow Mike Juang on @mikejuangnews and on the discussions at @namedvillage.
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