Shares of Nvidia are flashing a major warning sign

With a breakout rally like the one US stocks are experiencing right now, it’s hard to imagine anything could go wrong.

Maybe nothing will go wrong, but Nvidia’s (NVDA) 53% profit since April 15, time to watch carefully.

At Friday’s close of $131.88, Nvidia’s Relative Strength Index (RSI) was 80. The RSI is a measure of how fast a stock, commodity or index is rising – or falling.

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For Nvidia, 80 is a bullish reading and, more importantly, suggests the stock is overbought.

It does not mean that the company is in financial trouble. Nvidia is hugely profitable. Instead, many investors are chasing stocks that are undervalued and something has to give.

Perhaps some buyers will decide that the stock price is too high and will not pay. When that happens, investors see an opportunity, start buying, and stock prices fall until they break even.

Basic evidence supports this idea. Nvidia shares are up 166% this year. That’s up from a 239% gain in 2023. Stocks may be poised to slide.

Many stocks are vulnerable

In fact, while the S&P 500 Index and Nasdaq Composite are at record levels or near record levels, their recent gains have been smaller than the year before. The Dow hasn’t hit a new high since closing at 40,004 on May 17.

At the same time, there are large stocks with RSI levels high enough to trigger a pause.

The most bought list includes:

  • Pharmaceutical company Eli Lilly (LLY) 50.7% increase by 2024. Current RSI level: 78.

  • Technology giant Apple (APL) , grew 23.9% in the second quarter after a dismal first quarter. Current RSI level: 78.9.

  • Retailer Costco Wholesale (cost) It is up 29.6% this year after a 44.6% gain in 2023. The current RSI level is 78.4.

  • Chip Designer Arm Holdings (ARM) , an increase of 110% by 2024. Arm went public in mid-September and is up 47.3% in 2023. Current RSI level: 80.

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

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RSI helps investors manage risk

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

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

A reasonable way to think about RSI numbers is:

  • If the RSI is above 70, 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 – within a few days.

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

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The reverse is also true. If a stock is falling, reaching the 30 level is a signal of a bottom. Under 30, a reversal is imminent; At 20, it’s going to hit. Assumes that the company is not at risk of failure.

ARM Holdings went public in September 2023. A month later, the stock doubled between October and the end of February. By then, the stock’s RSI touched 90. But by April 15, shares had fallen 41% to $87.19; RSI was at 25.

The revival began the next day: ARM shares are up 81%, and the RSI is back at 80.

Indices, even Bitcoin, generate RSI data

Some companies’ stocks are oversold or actually oversold:

  • caterpillar (CAT) , down 12.3% in the second quarter and up 8.7% year-on-year. RSI: 30.6.

  • Conocophillips (COP) , down 5.8% this year and 14.1% in the second quarter. RSI: 27.6.

More on markets

This method applies to tokens as well as Bitcoin. As of Friday, RSI levels for the S&P 500, Nasdaq and Nasdaq Composite indices and Bitcoin:

  • S&P 500, up 13.9% year to date. RSI 72.3.

  • Nasdaq Composite, increased by 17.8%. RSI: 77.4.

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

  • Bitcoin: Sunday closed at $66,505. 56.4% increase during 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 1.

In the 2008-2009 market crash, the signal of a major bottom came on March 9, 2009. RSI readings 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 rose 78%, and the Nasdaq rose 78.9%.

Where to learn more

Calculating RSI is complex.

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

You can find the correct explanation for it here The Charts School section of Stockcharts.com.

In the meantime, keep an eye on Nvidia. The share price may fall. If you’re a buyer, that means opportunity. Why not if you don’t have to pay for a share?

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