Is It Time For Bulls to Strike on NVIDIA Corporation (NVDA)?

NVIDIA Corporation (NVDA) is pulling back after its recent record high, but history suggests a bounce may be forthcoming

Nov 4, 2016 at 11:50 AM
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Visual computing specialist NVIDIA Corporation (NASDAQ:NVDA) hit an all-time high of $72.95 in late October, and has since pulled back to its 40-day moving average -- a trendline that has been providing support since February. The shares have also doubled on the charts in 2016, and more than tripled from their mid-2015 lows. Despite this incredible technical strength, NVDA is still surrounded by plenty of pessimism, presenting an attractive opportunity for contrarians.

Looking to the brokerage bunch, nine of 23 analysts following NVDA rate the stock a "hold" or a "strong sell." Plus, in spite of a few recent upbeat notes, the average 12-month price target of $67.63 sits at a discount to the equity's current trading levels. Put simply, there is still plenty of room for analysts to upwardly adjust their outlooks, which could serve as a boon to the shares.

Short interest on NVDA is also elevated. These bearish bets rose by 10% during the last two reporting periods, and now account for nearly 12% of the stock's available float. At NVDA's typical daily pace, it would take about eight sessions for short sellers to cover these positions -- ample buying power to potentially give the shares a boost.

Pessimism has been running unusually high among options traders, as well. At the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), speculators have bought to open NVDA puts at the same rate as calls over the last two weeks. However, the resulting 10-day put/call volume ratio of 1.00 ranks higher than 79% of the past year's readings.

The put bias is even more clear among near-term traders. The stock's Schaeffer's put/call open interest ratio (SOIR) of 1.42 ranks just 9 percentage points from an annual high. That means traders have rarely been more put-heavy toward NVDA, when it comes to options due to expire in three months or less. An unwinding of bearish options positions could also produce tailwinds for the shares.

Adding to the bullish case for NVDA is peak open interest in the November series at the underfoot 65 put, which also saw the largest rise in open interest over the past 10 days -- with a good portion of these puts being bought to open. This could reinforce support at the $65 level, as front-month expiration approaches. In fact, the $65 region contained the stock’s most recent pullback, just before the rally to its record peak.

NVDA Daily Chart Nov 4

Speaking of technical support, the 40-day trendline mentioned earlier has been exactly that. Over the past three years, NVDA has touched the moving average eight times, and been positive 21 trading days out 71% of the time. Plus, the return over this period has been a gaudy 7.7%.

On the fundamental front, NVIDIA Corporation (NASDAQ:NVDA) is due to report quarterly earnings next Thursday night, and history suggests this could be another positive catalyst for the stock. After all, NVDA has made a move to the upside in the session following its report six times in the past eight quarters. Moreover, the average upside move across these occasions comes in at 10.5%. Today, the shares are up 0.1% at $68.01.

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