Nvidia Stock Displays a Major Warning Sign

When you’re faced with a rally like the one US stocks are enjoying right now, it’s hard to think anything could go wrong.

Maybe nothing will go wrong, but Nvidia’s (NVDA) The 53% gain since April 15 suggests it’s time to watch closely.

Nvidia’s stock closing on Friday at $131.88 put its relative strength index at 80. RSI is a measure of how fast a stock, commodity or index is rising – or falling.

Related: Why a veteran fund manager sold some Nvidia shares ahead of its split

For Nvidia, 80 is a high reading and, more importantly, suggests the stock is overbought and could fall soon.

This does not mean that the company is in financial trouble. Nvidia is extremely profitable. Instead, it means that too many investors are chasing too few stocks and something has to give.

Some buyers will likely conclude that the share price is too high and will not pay. When this happens, the stock price will fall until investors see an opportunity, start buying, and equilibrium is reached.

Basic evidence supports this idea. Nvidia shares are up 166% this year. And that’s on top of a 239% gain in 2023. The stock could be about to head lower.

NVIDIA CEO Jensen Huang has seen his company’s shares rise thanks to demand for AI.

Noah Berger/Getty Images

Many Stocks Look Vulnerable

In fact, although the S&P 500 index and the Nasdaq Composite are at or near record levels, their recent gains are smaller than those at the beginning of the year. The Dow has not reached a new high since closing at 40,004 on May 17.

At the same time, a number of big stocks have RSI levels high enough to give investors pause.

Related: Forget Nvidia, ‘Old Tech’ Stocks Are Hot (and Cheaper!)

The overbought list includes:

• Pharmaceutical giant Eli Lilly (LLY), an increase of 50.7% in 2024. Current RSI level: 78.

• Tech giant Apple (AAPL), an increase of 23.9% in the second quarter, after a miserable first quarter. Current RSI level: 78.9.

• Costco wholesale retailer (COST) , a 29.6% increase this year after a 44.6% gain in 2023. Current RSI level 78.4.

• Chip designer Arm Holdings (ARM), up 110% in 2024. Arm went public in mid-September and ended 2023 up 47.3%. Current RSI level: 80.

What the numbers suggest is that all four stocks are overbought and could be vulnerable to pullbacks.

RSI helps investors manage risk

Many investors care about the RSI and other technical indicators because they offer signals about when to buy, when to sell, and when to start the decision process.

In other words, RSI can help an investor deal with market volatility.

A reasonable way to think about RSI numbers is:

• An RSI above 70 means a stock is vulnerable.

• Above 75 means the stock price is rising beyond rational levels and a pullback is likely.

• Above 80 means a pullback will occur – perhaps within a few days.

The story continues

Traders work the S&P options pit on the Cboe Global Markets exchange on June 12.

Scott Olson/Getty Images

The opposite is also true. If a stock is falling, reaching level 30 is a sign that the bottom is approaching. Below age 30, a reversal is near; At 20, it’s about to crash. This assumes that the company is not at risk of going bankrupt.

Arm Holdings went public in September 2023. A month later, shares soared, doubling between late October and February. At that time, the stock’s RSI exceeded 90. But by April 15, the stock had fallen 41% to $87.19; the RSI was at 25.

The recovery began the next day: ARM shares have risen 81% since then and the RSI has returned to 80.

Indices, even bitcoin, generate RSI data

Some companies whose shares are close to being oversold or actually oversold include:

• Caterpillar (CAT) , down 12.3% in the second quarter, up 8.7% in the year. RSI: 30.6.

• ConocoPhillips (POLICE OFFICER) , a drop of 5.8% this year and 14.1% in the second quarter. RSI: 27.6.

More AI actions:

The methodology also applies to indices, even bitcoin. As of Friday, the RSI levels for the S&P 500, the Nasdaq, and the Nasdaq and bitcoin composite indices were:

• S&P 500, an increase of 13.9% year-to-date. RSI 72.3.

• Nasdaq Composite, up 17.8%. RSI: 77.4.

• Nasdaq-100 Index, up 16.8%. RSI: 78.6.

• Bitcoin: Sunday closes $66,505. increase of 56.4% in the year. (Bitcoin trades 24 hours a day.) The cryptocurrency is down 9.5% from its March 13 closing high. RSI: 44.6. High RSI for the year: 87.07 on March 1st.

In the 2008-2009 market crash, the signal for a big bottom came on March 9, 2009. The RSI levels for the Dow, S&P 500, and Nasdaq were all in the 20s.

Between then and the end of 2009, the Dow gained 59.2%, the S&P 500 jumped 78% and the Nasdaq soared 78.9%.

Where to learn more about the relative strength index

Calculating RSI is complicated.

The level can be found in market data from several financial websites, including Yahoo Finance and The Wall Street Journal.

A decent explanation of this can be found in Chart School Section of Stockcharts.com.

In the meantime, keep an eye on Nvidia. The share price may fall. If you are a buyer, this means opportunity. Why pay more for a share when you don’t have to?

Related: Veteran Fund Manager Picks Favorite Stocks for 2024

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