On June 20, Nvidia opened the trading day at $140.76 a share. That was another record high in a very long string of record highs. Hardly worth noting, really. As the AI leader, Nvidia stock was doing exactly what it was supposed to do – moving higher.
Only, it didn’t move higher. Nvidia shares sold off all day on June 20. It closed at $129 and change.
Outsider Club started to warn that the run for Nvidia was about tapped out on June 25. And we really started getting bearish on July 9, when Hammer told you the Housing Market is Broken.
My article This Chart Says: Game Over top-ticked the S&P 500 at 5,667 on July 16. Nvidia closed at $126 that day. It’s down 16% since, to $105.
If you’ve been tempted to buy some Nvidia shares on this drop, well, I don’t blame you. I’ve thought about it too. But I’ve held off and I’ll show you why:
First is that red box I’ve drawn. That gap on the chart you see occurred when the stock opened at $102 on May 23, after closing the previous day at $94.95. This is called a gap, and the trading rules say that all gaps must eventually get filled…
Especially given the recent action, it is hard for me to see that gap and not think “Nvidia is headed to $95.”
Then there’s the crude yellow line I drew on the chart. That line runs between $75 and $80. That was the floor for the stock for nearly 3 months, from late February to early May.
Nvidia could fall back to that support level and still be up 70% for the year.
I’m not saying Nvidia will fall that low, only that it could. Regardless of where Nvidia finds a bottom, there’s one thing you need to watch for: CAPITULATION.
Capitulation
Capitulation is defined as the action of surrendering or ceasing to resist an opponent or demand.
To capitulate is to give up, to throw in the towel and stop fighting – because you aren’t winning.
For an investor, capitulation is when the fear of losing money outweighs the greed of making money. Capitulation happens when an investor finally gives up and sells.
Sadly, capitulation is a difficult place to get to. Because when investors have fully bought into a rally for stocks based on transformative technology, they cease to be investors. They become believers. And for whatever reason, once you become a believer, the mind becomes a very hard thing to change…
A bear market is death by a thousand cuts. A bear market’s job is to grind investors down until they can’t take it anymore. That’s when they sell. And that’s when the market (or stock) finally bottoms.
The most famous capitulation ever occurred in early 2009, when the Great Financial Crisis ended. On February 9, 2009, the S&P 500 closed at 869. Over the next 30 days, the index fell another 23% before the bottom was finally in. Imagine being able to buy the S&P 500 at 869, and saying “nah, I’d rather sell.” But that’s how bad it was…
Anyway, from current levels, 23% would be a 1,250-point drop all the way to last November’s lows.
My point is not that the S&P 500 is about to wipe out the entire rally since November in a month. My point is that there will need to be a capitulation event before this market can get itself back on track.
The AI story has been endlessly touted to investors for over 18 months. It is hardly a surprise that there are a lot of believers out there. It will take a while to grind them down…
The best psychological warfare tool for grinding someone down is to offer up some false hope and then snatch it away. So look for a market rally sometime soon. Let some hope build and then snatch it away during the worst month for stocks, September.
Cheers,
Briton Ryle
Chief Investment Strategist
Outsider Club
X/Twitter: https://twitter.com/BritonRyle
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