All eyes are on Nvidia lately, with its triple-digit earnings and sales growth, triple-digit share price returns and outsize stock market impact as of late. So a heavy-volume downside reversal off highs this week begs the question: How should traders handle their gains in Nvidia stock?
Nvidia is an AI leader that's been in focus for Joe Fahmy, portfolio manager at Zor Capital, for many months. He told Investor's Business Daily's "Investing with IBD" podcast that he's "seeing nonstop bullish flows" from an options market standpoint, increasing his conviction.
Audio Version Of Podcast Episode
Balancing Conviction With Sell Signals
"The spend for AI is still in its early stages," said Fahmy. He agrees with assessments that Nvidia's revenue can triple in the next three to four years, surpassing $250 billion.
But that doesn't mean traders can't trim their positions. Shares of Nvidia several weeks ago triggered a profit-taking signal after advancing more than 20% past a split-adjusted 97.40 buy point. That was the first early sign to consider to take some — though not all — profits off the table, but the stock continued to advance. As Nvidia became more extended from its moving averages, the odds of a pullback increased.
Thursday's downside reversal, while not fun for shareholders, was not an unexpected move. After nearly doubling in three months, the leading AI stock deserves a break. Odds are it needs more time to cool off, but a strong bounce back wouldn't be out of the cards either. Regardless, some traders may opt to use this near-term weakness as an opportunity to cut back their Nvidia stock holdings.
Is this just a short-term peak, or is Nvidia stock due for a longer break? Only time will tell. That's why flexible sell signals are key.
Selling Nvidia Stock Doesn't Mean Exiting
Learning your sell rules doesn't mean exiting your entire position in a stock, but learning how to take some profits when the opportunity presents itself, Fahmy says.
For investors with a longer-term time horizon, adding on the way up and waiting to cut back when a stock breaks a key moving average like the 10-week line can be a sound strategy.
"I've been holding a core position in (Nvidia stock) and I'm just adding on at certain levels," said Fahmy.
Fahmy also says selling a stock does not mean you can't reenter it later. After trimming with a decisive break of the 10-week line in mid-April, he added back to his position on Nvidia stock once the stock began to stabilize later in the month.
Learning To Ignore FOMO
The fear of missing out, or FOMO, can also make it harder for traders to follow their sell rules. Fahmy says this is true even when traders hold a position in a leader like Nvidia stock.
The key is to realize that a winning position is indeed still a winning position. "If you made, let's say 20% or 30% on a stock, there shouldn't be FOMO, because you made money," he added.
If Nvidia stock is a big winner, where do bullish traders place their ultimate line in the sand to get out of the trade? For Fahmy, that level is the 200-day line.
This allows for a lot of room for the stock to work over a longer time horizon while still making sure you're on the right side of a stock's overall trend. Holding one's entire position down to that level isn't realistic, but that's where trading around a core position can be helpful.
At the end of the day, when determining how to handle Nvidia stock, it all comes down to each trader's own time horizon and risk tolerance.
Market Pauses As Nvidia Skids; Two Titans Near Buy Points
Nvidia Stock Split
Fahmy says he remains unfazed by Nvidia stock's recent 10-for-1 stock split, which occurred earlier this month. "I know it seems like excessive stock splits," said Fahmy. "I know a lot of people think stock splits are garbage."
"I think it's a bullish indication from the company that there's still more growth ahead," Fahmy said
Nvidia stock had its 10-for-1 stock split on June 7. The split ushered in a slate of price hikes from analysts and helped push the stock comfortably past its profit zone.
Nvidia is currently ranked No. 1 in the Electronics-Semiconductor Group according to IBD Research and holds a perfect Composite Rating of 99. Nvidia stock has gained more than 150% year to date.
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