My Nvidia, AMD Strategies Are About to Change. Big Time.

For the past two years, Nvidia  (NVDA)  was one of the engines that pulled this market higher. Apple  (AAPL)  and Alphabet  (GOOG)  are now performing that task, as explained here.

Six months ago, I wrote that Nvidia was about to steal the spotlight (point A). Since then, despite the stock’s recent pullback, Nvidia has gained over 55%.

We liked Nvidia at that time thanks to a bullish double-bottom pattern. Now that a bearish pattern is emerging, however, is it time to lock in some gains?

Nvidia has formed a head-and-shoulders pattern (shaded yellow). On Tuesday, the stock broke the neckline (point B) of that pattern at $177 (black horizontal line). 

Nvidia subsequently traded below $170 for the first time since September, before fighting back to close at $177. 

Instead of battling, Nvidia should be cruising. The stock has lost ground while the major indexes have put together a three-session winning streak.

AMD Is Showing Similar Traits

Advanced Micro Devices is another stock we recommended in May. Even after a recent pullback, we’ve gained over 90% on this AI chipmaker.

At the time, I wrote that Wall Street "had it wrong" regarding AMD’s potential. Now that potential seems to be fully recognized, and is perhaps priced into the stock.

Like Nvidia, AMD has formed a bearish pattern, in this case a rounded top (shaded yellow). The stock has failed to gain ground over the past three sessions, displaying relative weakness. Advanced Micro has also fallen below its 50-day moving average (blue).

Ironically, our initial position was entered when the stock climbed above the 50-day moving average, at $105 (point A). If the move above the 50-day MA was a sign of strength, then falling below that key indicator should be considered a sign of weakness.

Also, AMD saw a huge gap higher back in October (point B). If that gap fills, the stock could fall to the $170 area.

Valuations and Competition

Why the relative weakness in both Nvidia and Advanced Micro Devices? 

There are concerns about the valuations that have been awarded to AI chipmakers. There have been accusations of questionable accounting practices in the AI space. While there has been no proof of wrongdoing, these concerns are hanging over the sector like a dark cloud.

Competition is heating up within the space, as Meta Platforms  (META)  is considering using Alphabet’s chips. Nvidia responded to this threat on Tuesday, claiming its products are a “generation ahead” of its competitors.

Hold or Sell? Why Not Both? 

It’s been said that you can’t go broke taking a profit. It’s also true that you can’t win the game while you’re standing on the sidelines.

I’m going to compromise, by closing half of my Nvidia position with a solid 55% gain. I’m also locking in a nice gain of 90% on half of my Advanced Micro Devices position.

Reducing these positions by half limits my exposure to the AI chip space. I’m still holding a full position in Broadcom  (AVGO) , so that exposure isn’t insignificant.

Bottom Line

Some might ask, “Ed, don’t you believe in these stocks anymore?”

Here’s my reply: It’s not a question of belief in a stock. It’s a question of believing what I see on a chart. I know technical analysis isn’t perfect, but I’m not going to ignore what I see as clear warning signs about stocks in the AI chip sector. 

At the time of publication, Ponsi was long AAPL, AMD, NVDA, AVGO.