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Here’s How to Buy the Nvidia Stock Dip

Tyler Craig
·4 mins read

The Nasdaq’s naughty streak is making many reassess their love affair with the tech sector. The three-day 10% drubbing is undoubtedly sufficient reason to update our watchlist and weed out the once-beautiful uptrends that are now destroyed. Fortunately for semiconductor fans, Nvidia (NASDAQ:NVDA) still has a chart worth pursuing. Today we’re breaking down how NVDA stock has fared during the tech fallout and offering up two options trades to play it now.

An Nvidia (NVDA) semiconductor chip on a black background.
An Nvidia (NVDA) semiconductor chip on a black background.

Source: Hairem / Shutterstock.com

To properly set the table, we’ll first look at the Nasdaq Trust (NASDAQ:QQQ) and the Semiconductor Holders (NYSEARCA:SMH) for context around where Nvidia’s sector and industry lie. Then, we’ll take a deeper dive into the support zones that matter for NVDA stock right now.

The Naughty Nasdaq and NVDA Stock

Powershares QQQ (QQQ) chart showing pullback to 50 moving average
Powershares QQQ (QQQ) chart showing pullback to 50 moving average

Source: The thinkorswim® platform from TD Ameritrade

All uptrends are interrupted with garden-variety retracements and deeper corrections. They inject much-needed doses of doubt and fear that ultimately allow the trend to last longer. Not to mention the fact that they create support zones along the way to make the trend more sustainable. When viewed from that perspective, the three-day thrashing we just witnessed in QQQ is healthy.

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While it broke the 20-day moving average, it has thus far held the 50-day as well as all previous pivot lows. It says something about just how overbought the Nasdaq was that it could correct 11% and not breach any significant floors.

Tuesday’s descent ushered prices right to the rising 50-day moving average. This morning’s gap higher is showing buyers have emerged right on time to avoid their beloved Index from reversing its overall uptrend. If today’s strength can hold, it could signal the pullback is over and a new upswing is beginning.

 Sliding Semiconductors

Semiconductor ETF (SMH) showing break of 50-day moving average
Semiconductor ETF (SMH) showing break of 50-day moving average

Source: The thinkorswim® platform from TD Ameritrade

The semiconductor industry has been one of the growth engines for the Nasdaq’s booming bull market. As you’d expect, it has been dragged down alongside everything else over the past week. In addition to NVDA stock, other big industry names from Advanced Micro Devices (NASDAQ:AMD) to Taiwan Semiconductor (NYSE:TSM) have been pulled lower.

To gauge the damage, we can use SMH. From peak-to-trough, it has fallen 11.3%, essentially matching the Nasdaq’s decline. But, unlike the Nasdaq, SMH did break its 50-day moving average. It also breached the horizontal support zone at $167. Wednesday’s gap higher could be its saving grace, however. If the gains hold, it will invalidate the breakdown and put the overall uptrend back on solid footing.

As ugly as it’s been, I ultimately think the dip in semis is a buy. And NVDA stock is one of the better-looking setups of the bunch.

Nvidia Stock Charts

Nvidia (NVDA) weekly chart showing tripling off March low
Nvidia (NVDA) weekly chart showing tripling off March low

Source: The thinkorswim® platform from TD Ameritrade

If you’ve lost sight of just how far NVDA has come, then take a good look at the weekly chart. It’s tripled since March. Of all the stocks in the market, this one is perhaps the most deserving of a breather. Compared to the meteoric ascent, the last week of selling is just a scratch. We could pull back to $400 and the weekly uptrend will still be healthy.

As you’d expect, the damage appears worse on the daily time frame. We did breach the rising 20-day moving average and are currently wrestling with breaking a previous pivot low. But with the 50-day rising aggressively below and other support pivots looming close, we still have to view this as a buying opportunity.

Nvidia (NVDA) chart showing bull retracement
Nvidia (NVDA) chart showing bull retracement

Source: The thinkorswim® platform from TD Ameritrade

Implied volatility is juiced at the 46th percentile. That makes using spreads a must. You can either take the high probability road with bull puts or go for a bigger payday with bull calls.

Bull Put: Sell the October $400/$395 put vertical for 90 cents.

Bull Call: Buy the November $530/$540 call vertical for $3.45.

On the date of publication, Tyler Craig held LONG positions in AMD and TSM.

For a free trial to the best trading community on the planet and Tyler’s current home, click here.

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