Monthly Archives: August 2018

Gaming The NVIDIA Earnings Trade – Based On This Technical Correlation

There is a close correlation between the movement in the stock price of Electronic Arts (EA) and the price action in NVIDIA (NVDA) shares.

This is not surprising, NVIDIA chips are used in gaming processors and by cloud-based gaming streaming services, and Electronic Arts is a major supplier of content and services for game consoles and streaming service providers.

But this relationship could help in gaming a trade around today’s NVIDIA earnings report.

The graph at the bottom of the chart illustrates the EA and NVDA price correlation. A reading above 50 reflects a positive correlation and a negative reading indicates a negative correlation. NVDA and EA are positively correlated a large percentage of the time.

Electronic Arts usually files their own earnings report just days before NVDIA. The blue lines on the chart are prior reporting days for EA and the red lines the following NVDA reporting days. In its most recent July 27 report, EA beat estimates but lowered forward guidance. The stock price was punished severely, down double digits in the days immediately after, and it has yet to recover.

NVIDIA shares dropped below their 50 day moving average in sympathy but held a long standing uptrend line. They bounced off the trendline, recovered the average, and have tracked higher going into today’s report. The correlation coefficient indicator has moved into negative territory reflecting the diversion between the two stock prices.

A reversion towards a closer correlation would seem likely. The price action in Electronics Arts shares has been the leading indicator. The implication then is NVIDIA shares should move lower following their Thursday earnings report.

One caveat, note the reaction in NVDIA shares after the late October 2017 Electronic Arts report. EA shares moved lower after the company reported and continued lower into the end of November. NVIDIA dropped the day after it reported in early November but bounced higher the following day. Shares continued higher for the next two weeks before they reversed and headed sharply lower into early December. In December both stocks had returned to their normal positive price correlation.

What Is Going On With This Market?

In yesterday’s session the major market indices closed near their lows and the day before they closed near their highs. Today they dropped hard at the open retesting minor support levels. By mid-session they were on the mend and ultimately closed well off their lows forming hammer-like candles on the charts. Tomorrow they will likely open stronger, but ultimately the ability to hold higher levels into the weekly close will be key to determining their intermediate term direction.

What’s going on? Let’s take look at the charts.

The S&P 500 Index touched an intersection of resistance last week. At the time, we tweeted out about the event. This 2870 area of resistance is defined by the channel uptrend line the index has been trading in for the last four months, and the January high.

This test was followed by several days of decline and then the trap door open today. The DJIA was down over 320 points at one point in the morning before the indices began a mid-session recovery that eliminated nearly half their losses.

On the S&P chart, the retest of minor support at the 2800 level initiated its bounce, and a well-defined hammer candle formed at the close. The hammer is a bullish indication.

The NASDAQ Composite has been moving within the confines of a large rising triangle pattern. Today’s low retested the triangle support line and the 50 day moving average. As it approaches the apex of the triangle, it becomes increasingly likely that a decision will be made as to the future direction of the index. A strong move could could follow.

A break above the rising resistance line could trigger a move higher. We have seem hyperbolic moves after similar trading patterns. On the other hand, a break below pattern support and an intermediate to long term pullback could follow. There are several levels of horizontal support indicated on the daily chart.

The Dow also tested its 50 day average and ultimately formed a hammer candle on its chart. Things are looking a little more bearish on the Russell 2000 Small Cap Index.

It bounced off the support line of a rising triangle but remained below its 50 day average. The bounce was weak and the day’s price action formed a bearish engulfing candle on the daily chart. An engulfing candle did not form on the iShares Russell 2000 ETF chart.

So, while the day-to-day price action has been erratic, it has been playing out between well-defined levels of support and resistance on these index charts. If that is any comfort to whip-sawed traders.

The Reason I Shorted The Tech Sector On Monday

I bought some ProShares UltraShort QQQ (QID) at the close on Monday. At this early point in the Turesday trading session, it looks like I should have waited to make the buy. Stops are in place and I’ll evaluate the traded as it progresses. The thinking behind the trade is still intact and it centers around the FANG stock charts.

Facebook (FB) shares are still reeling from the hit they took last month. They had managed to get back above their 200 day moving average early last week. but faded on Friday. Facebook closed under the average on Monday and at the lower end of its trading range. This price action formed a high-wick doji, or narrow opening and closing range, candle.

Amazon (AMZN) is the only one of the FANG group to make a new high this month, but an ominous “gravestone” doji formed on its chart on Monday. This candle has a narrow opening and closing range that is positioned at the bottom of the overall candle range. Its implication is obvious: price could not hold its highs of the day and retreated back to where its started.

It seems unusual to say but Netflix (NFLX) shares have been trending lower. A bearish shooting star candle formed on its chart on Monday. One formed on the Alphabet (GOOGL) chart. This candle has the same negative connotation as the shooting star or the gravestone doji.

A single day’s candle does not a trend make and I may have been early on this trade. But I’m in the position and now all efforts are on monitoring the position, making adjustments to the stop if necessary, and basically managing any potential loss.

If it turns out to be profitable, that’s good, too.

Burlington Stores Leading Another Retail Sector Breakout

Shares of Burlington Stores (BURL) are breaking out of a cup and handle continuation pattern and making new highs.

Cup and handle rim line resistance is located at $158 level on the Burlington chart, and the stock is currently trading in the $160 area. The relative strength index reading reflects renewed positive price momentum and the money flow indications and volume level suggests that the stock is being accumulated.

A similar cup and handle pattern has also formed on the SPDR S&P Retail ETF (XRT) chart. The ETF Is breaking above its resistance line. This is a positive for the sector in general but particularly for Burlington shares, which have consistently outperformed the broader retail space. They are up 21% relative to the XRT over the last six months.

This could be the start of a second phase in the retail rally that began nine months ago.

Tesla Chart – A Potential Triple Top Forming?

Tesla (TSLA) shares are up 28% in the last five days. They are currently flirting with the $390 level which marked the double top in the stock that we noted here last November.

This third test of resistance could be the charm and Tesla could break through to new highs. Or the $390 level could continue to act as a barrier. Then the advance in the stock price would be halted forming a triple top on the chart.

Tesla’s stock price dropped 38% in the five months following the 2017 double top.

A bottom was made in April this year and by June shares had managed to get back up to the $360 area. This area had also been resistance earlier in the year and it held once again. The stock price retreated back to the $290 area.

Then came the Tesla earnings report this month and Elon’s apology on the subsequent call. The stock gapped higher the next day. This was followed by the recent tweet about potentially taking the company public. Tesla shares accelerated like only a Tesla can after that one.

The $390 level was touched in trading on Tuesday and again on Wednesday but each time the stock pulled back off those session highs.

So the obvious question now is: are Tesla shares headed for new all-time highs or in the process of making a triple top?

From a technical perspective the $390 level should be formidable resistance, considering it was the double top level last year. But the price momentum indicators are tracking higher while volume has spiked and money flow is turning positive.

If the upside momentum continues and the $390 level is taken out, then the mysterious $420 level is the first upside target. This $420 level was also mentioned in another Musk tweet.

If shares pull back off the triple top resistance level then the nearby $360 former-resistance area should become support. If that level were to fail, the July $290 low is the next downside target and below that the $260 April low.

The dynamism of Elon Musk’s personality has been powering Tesla’s share price. But monitor the support and resistance levels as outlined on the chart, ultimately price action around these levels will map Tesla’s journey.