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Nvidia’s shares flashes key warning sign
When you have a breakout rally like what U.S. stocks are enjoying just now, it’s hard to think anything could go wrong.
Maybe nothing will go wrong, but Nvidia’s (NVDA) 53% gain since April 15 is suggesting it’s time to watch carefully.
At Friday’s close and a price of $131.88, Nvidia’s relative strength index (RSI) sat at 80. RSI is a measure of how fast a stock, a commodity or an index is rising — or falling.
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For Nvidia, 80 is a high reading and, more importantly, suggests the stock is overbought and could take a dive sometime soon.
It doesn’t mean the company is having financial trouble. Nvidia is wildly profitable. Rather, it means too many investors are chasing too few shares, and something has to give.
That something will probably be that some buyers will conclude the stock price is too high and won’t pay up. When that happens, the stock price will fall until investors see an opportunity, start buying, and equilibrium is obtained.
The 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 may be ready to sag.
Many stocks are looking vulnerable
In fact, while the S&P 500 Index and Nasdaq Composite are at record levels or near record levels, their recent gains are smaller than earlier in the year. The Dow hasn’t achieved a new high since closing at 40,004 on May 17.
At the same time, there are a host of big stocks with RSI levels high enough to make one pause.
The overbought list includes:
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Pharmaceutical giant Eli Lilly (LLY) , up 50.7% in 2024. Current RSI level: 78.
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Tech giant Apple (AAPL) , up 23.9% in the second quarter after a miserable first quarter. Current RSI level: 78.9.
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Retailer Costco Wholesale (COST) , up 29.6% this year after a 44.6% gain in 2023. Current RSI level 78.4.
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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 all four stocks are overbought and and may be vulnerable to pullbacks.
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RSI helps investors manage risk
Many investors care about RSI and other technical indicators because they offer signals on when to buy, when to sell and when to start the decision process.
In other words, RSI can help an investor cope with market volatility.
A reasonable way to think about RSI numbers is:
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An RSI above 70 means a stock is vulnerable.
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Above 75 means the stock price is rising beyond rational levels and a pullback is likely coming.
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Above 80 means a pullback will arrive — maybe within days.