Predicting what an individual stock will do in the short term is a bit like predicting the weather.
You can’t know for certain, but you can be very confident based on how much information you have available.
If dark clouds are gathering, nearby towns are already experiencing storms and the wind is blowing those clouds towards you, you’ve got a pretty good reason to expect rain and to carry an Umbrella around with you that day.
I approach the stock market with a similar mindset. I’m looking for clues that help me to predict what might happen next, while accepting that we can't be 100% sure anything will happen in any aspect of life.
At the moment, we have a strong clue in the stock market that means you may want to consider buying some Nvidia stock.
Stocks don’t move in isolation
When people think about the stock market, they often picture thousands of individual businesses, each with a share price moving independently according to how well that company is doing.
That’s part of the picture. But companies also operate within industries, and their share prices often respond to the same changes in demand, economic conditions and investor sentiment.
That’s why, when I’m looking at a stock, I’m also interested in what’s happening around it.
This brings us to correlations...
Stocks in the same sector of the market usually move up and down together in varying percentages. This means, if you have 5 similar stocks in a sector and 4 of them have gone up, but 1 of them hasn't moved yet, we often find that if there's no specific news relating to that lagging stock, it'll often catchup and move with the 4 stocks it's correlated to in the near future.
Is AMD a clue for what NVIDIA does next?
AMD and Nvidia are two major chip designers with exposure to gaming, artificial intelligence and data centres. AMD develops both CPUs and GPUs, and Nvidia’s products also extend beyond graphics cards into data-centre processors and systems. Their businesses overlap, and historically the way their stocks move are highly correlated.
That gives me a reason to look at them alongside each other. Enthusiasm for spending on computing and AI can be relevant to both, even though it won’t necessarily benefit them equally.
As you can see in the chart below, AMD has recently pushed to new all-time highs.
Meanwhile, Nvidia has spent much of the past month chopping around inside a sideways range.
As you can see. AMD has broken to new all time highs, while Nvidia has been stuck in a sideways range for about 6 weeks.
WHY SHOULD WE BE PAYING ATTENTION TO THIS?
Although Nvidia has been moving sideways overall, the lows within that range have been gradually getting higher.
In other words, the pullbacks have been stopping at slightly higher prices, using the 55 exponential moving average as a consistent base of support. [the cyan squiggly line on the chart above]. You can see that the 55 exponential moving average is slowing "walking" the price of Nvidia stock up higher and higher.
AMD stock broke to new all time highs and since Nvidia and AMD stock are highly correlated, there's a good chance that Nvidia follows AMDs lead soon.
What I think happens next...
With AMD recently breaking out to new all time high's, there's a very good chance that NVIDIA will also breakout soon with how strongly the stocks have been correlated historically.
That’s my interpretation of the setup. AMD’s rally alone doesn’t establish that Nvidia will follow, but if Nvidia doesn't break out here, it'll have to reject from a major level of resistance which feels unlikely given AMD just broke out. Why would AMD break out to new all time highs, while Nvidia rejects? That wouldn't make any sense. You'd expect either both of them to reject or both of them to breakout and Nvidia hasn't broken out... YET!
I also want to be clear about what would make me reconsider. If Nvidia loses the pattern of higher lows and breaks below the support holding this range together, the chart would no longer support the same bullish interpretation. If AMD gives back its breakout, that would weaken the prediction too.
For now, I’m leaning bullish and paying attention to whether Nvidia’s own price action starts to support that view.
Putting the prediction on record
One of the reasons I want to write diary entries like this is that it’s easy to look back at a chart after a big move and convince yourself it was obvious.
Writing down the idea beforehand a move happens locks in our thought process before something happened so that in the future we can analyse what was good about our prediction and where we got things wrong. It's exactly like evaluating our betting history so that we can improve over time.
This is the Diary of a Pro Gambler, and part of that diary should be sharing how I think about uncertain outcomes while they’re still uncertain.
One correct prediction wouldn’t prove an edge, just as one winning bet wouldn’t. Over time, though, a record of these observations should give us a more honest way to assess the thinking behind them.
Let’s see where Nvidia is in a couple of weeks.
These are my personal observations and opinions, not financial advice.