This is clear by the irrational rally of NVIDIA (NVDA) now trading above $400 per share… while great companies with strong cash flow are falling Tuesday.
Irrationality is a hallmark of investing, trading, and human psychology.
I’m always focused on fundamentals in the market. From a microeconomic perspective, we use metrics to measure how companies boost their return on equity, increase profitability, enhance shareholder return, and lock down their balance sheet.
But technical analysis is also extremely important.
Even the strongest fundamentals can’t reflect a strong price trend in a stock. There are stocks that look cheap but might be value traps because of their volumes and the types of investors they tend to attract.
That’s especially the case in the nano-cap to small-cap environment. Different analysts have different price conclusions, and this is just one little piece of the puzzle for investors trying to navigate the landscape.
So, how do we read investor sentiment in real time?
When can we safely say that the selling is too extreme? Or argue that the rally is too long in the tooth?
To answer these questions, let’s turn to one of four critical technical tools that I watch as an investor and trader… the Relative Strength Index.
Buy Cheap, Sell Strong
The RSI, or relative strength index, is a great technical tool to gauge market sentiment on a specific stock.
J. Welles Wilder, Jr. created it in 1978 to measure recent price movements and the strength of a stock’s price trend.
The RSI ranges from 0 to 100, with extremes indicating buying and selling conditions. The industry standard is a 14-day measurement.
An RSI under 30 suggests oversold conditions, signaling a potential buying opportunity.
Conversely, an RSI above 70 indicates overbought conditions, hinting at a possible pullback.
Let’s examine a chart that illustrates this behavior.
You all know NVIDIA. The chipmaker has been on an absolute tear since hitting lows in October.
Back then, shares had an RSI of 30 on its daily chart. On its weekly chart, it also had an extremely oversold reading: 31.11.
When shares peeled back to the 31 level on the weekly chart, sentiment was extremely bearish – not just for NVDA but also for the market itself.
At the time, the United Kingdom faced serious economic problems, the U.S. mortgage-backed-security market was under stress, and there were increasing challenges facing emerging markets.
But you can see that investors willing to follow the policy pivots and buy the stock in oversold conditions would have made a pretty nice profit even before Artificial Intelligence sentiment overwhelmed the NASDAQ 100 and S&P 500.
Today, NVDA is clearly overbought and has become a traders stock. Its RSI on the daily, weekly, and monthly charts are now all above a 70 reading.
From a momentum perspective, it’s still possible to buy and trade a name like NVDA, but it requires very sound risk management and a commitment to learning other technical indicators to help you find success.
We’ll talk about another momentum indicator tomorrow that’s just as powerful as RSI – and will improve your timing in the future.
Join Us for Our Spectacular Live Event!
Tomorrow at 11am ET, “Roundtable” will feature Don Yocham, Roger Scott, Celeste Lindman and special guest, Jeffrey Muller. During this free live event, they’ll discuss:
Bid Farewell to Fed Pivot: Markets now anticipate a 25-point hike during the upcoming Fed meeting in June. The prospect of 6% interest rates was jaw-dropping just a few weeks ago. They’ll delve deep into the driving forces behind this momentous shift in expectations..
Unleashing the Power of AI: The Ground-Floor Opportunity! Jeffrey Muller will unveil an extraordinary ground-floor opportunity in the world of Artificial Intelligence. You’ll learn how to ride the wave of innovation that can revolutionize the ways we create wealth.
Roger’s Revelations: Find Hidden Treasures in Beaten-Down Sectors! Roger will discuss several struggling sectors on the cusp of a remarkable reversal. You’ll discover the untapped potential of these neglected gems.
Cycle Mastery: Conquer Short-Term Trading with Long-Term Vision Finally, the brilliant Celeste Lindmann will guide you through cycles and strategies that will unlock the path to lucrative short-term options gains. Celeste’s insights could change the way you approach trading.
Don’t miss out on this extraordinary opportunity to join a community of like-minded traders and investors. Go right here at 11am ET tomorrow.
To your wealth,
Garrett Baldwin
*This is for informational and educational purposes only. There is an inherent risk in trading, so trade at your own risk.
Market Momentum isRED
There are questions about the likelihood of a debt deal and the upcoming OPEC+ meeting. Policy is dominating the narrative in the market, and we haven’t even started talking about the Fed’s upcoming meeting in two weeks. This negative news cycle is one reason why you need to consider a longer-term focus with Tactical Wealth Investor. I will reveal my latest value and income play this week, so jump in right away.
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My first trade recommendation earlier this month looks right on target. Want to see what I have in store for my newest trade alert? Go here at 1pm ET tomorrow to find out.
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*This is for informational and educational purposes only. There is inherent risk in trading, so trade at your own risk.
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