It is hard to forget about the fundamentals with Nvidia but let’s for a moment called the company XXX and just look at the chart. We can see the more recent price action below. We have a falling but not yet negative Coppock. We have a broken uptrend line and the moving averages, after bunching, have turned decisively lower.
I love Nvidia’s fundamentals and its charismatic founder CEO, Jensen Huang, but this chart is warning of possible trouble ahead. I am torn by shares in companies like Nvidia. I so want to be bullish, but I find it hard to flout the message of the charts, especially when it is as unequivocal as this.
I remember in 2000 when the charts were turning lower, but the fundamentals still blazed with excitement. It made markets hard to read, but in the end, the charts were right, and the fundamentals melted away.
The other factor that weighs with me is why take the risk. It is rewarding to hold shares while their Coppock Curve is climbing, and exciting to buy when Coppock turns higher after a long decline. This will happen, so why not keep our powder dry for that day?
We all have to make our call. Do we keep faith with the fundamentals? Do we back the chart? Or do we do both? Agree that the fundamentals are amazing, but keep our powder dry, or even step aside, until the charts confirm the fundamental message.
Below is another Nvidia chart focusing on the more recent trading. It raises the question, still wearing my Ivory Tower Charting hat, of whether Nvidia could be forming an important top area.
Could we gain a clue from looking at another chart? Microsoft has the same negative features as Nvidia, falling Coppock, declining moving averages and a broken trend line (not shown). It is also trading below an extended period of sideways trading, known to chartists, in this formation, as an area of distribution.
The shares are vulnerable to unexpected bad news. My well-connected father, many years ago, was the friend of a man called Paul Chambers, who was the chairman of ICI, at that time arguably the most important UK company. He once told my father that ICI had 15,000 more employees than it needed. He also, I think, at the onset of the early 1980s recession, said that demand suddenly fell off a cliff.
Imagine if that happened to the data centre boom as it happened to the telecoms infrastructure boom in 2000. I don’t have a crystal ball, and I don’t know what the future holds, but the charts are compatible with a bad outcome.
Here is another chart pointing to caution.
ServiceNow is an exciting company with an electrifying CEO, but this is not a great chart. Coppock has wobbled around in recent months, but that has resolved into a steepening decline. The recent sharp rally looks like a bear market rally, not a turning point. The moving averages have rolled over, and any trend line you might draw has been broken.
There are two major components to demand: consumer spending and investment spending. The latter is smaller but by far the more volatile. Consumers have to eat, travel, pay rent, go on holiday, and they do this come what may. Companies are different. When things get tough or if they become alarmed, they can take an almost immediate axe to their discretionary spending, and they do.
Trump’s gyrations are playing havoc with business confidence, not least because there is no telling what he might do next. This is the perfect excuse for companies to defer spending, and that can quickly ripple through an economy with devastating effects.
I don’t know if this will happen, but the charts are flashing at least orange, even red.
Strategy – Volatility May Resolve Downwards
Stock markets are in a heightened state of uncertainty with massive updays followed by severe downdays. Coppock helps us see the wood for the trees and tells us that investors should be cautious. If you have a stock you wish to buy, be prepared to buy at falling prices and be wary of being overextended, even with your highest conviction investments. Look what happened to me, and I still believe that Palantir is one of the most exciting businesses I have ever encountered.
The other thing that always weighs with me is that bear markets create great buying opportunities. The long-term trend in US shares is strongly higher. As Warren Buffett has pointed out, trying to be clever with buying and selling can end up being a lot of sound and fury signifying nothing, as Shakespeare might have said.
In the case of Nvidia, the charts look negative, but there is no concrete evidence that global demand for additional computing power is slowing at all, and why should it if planet Earth is going from being a wired world to a giant computer?
Maybe it is like a marriage. There will be ups and downs, but if you can stick with the one you have, that can prove very rewarding.
