NVIDIA topping, services slowing down, volatility still high

Yesterday, there were multiple notable developments in the market. First, the S&P Global Composite PMI release showed a further slowdown, dropping to 50.4 in August 2023 (marking the third consecutive month of declines); the S&P Global Services PMI printed 51, and the latest S&P Global Manufacturing PMI figure came in at 47. Earlier this year, one of the main narratives supporting the market upside was that services and employment were robust despite manufacturing already contracting. Now, the latest data suggests the services sector is also shifting toward contraction, which is hardly bullish. In fact, we can argue that it is somewhat troublesome, considering the unraveling property crisis in China (without any clarity as to what the government will do to stop it) and the latest data from Europe showing contraction in manufacturing and services sectors alike.

Second, we saw earnings from NVIDIA (yesterday), which surpassed all analysts’ estimates and resulted in shares gaining more than 8% after the market close. While the corporate results were great, there is one thing we can’t ignore. It is a fact that NVIDIA rose more than 230% this year and reached the extreme near the upper bound of the trendline that connects its peaks (suggesting there is very little to no upside left for the stock). With regard to the weight of NVIDIA in SPX, if shares of the company take a dive, it will negatively impact the overall health of the index.

Consequently, we remain highly vigilant and continue to pay attention to the daily chart of SPX. Stochastic and RSI turned slightly bullish; however, MACD is still within the bearish territory. Besides that, we have not seen a crash in VIX, which leaves a possibility of further downside in the U.S. stock market.

Illustration 1.01

Illustration 1.01 displays the daily chart of NVDA and a simple sloping support. A breakout below the sloping support will be bearish for the stock. In fact, this setup can be utilized by placing a short entry below the support and a stop-loss order above it.

Illustration 1.02

Illustration 1.02 shows the daily chart of VIX.

Illustration 1.03

The picture above shows the daily chart of SPX and two simple moving averages. The yellow arrow indicates a looming bearish crossover between the 20-day SMA and the 50-day SMA. If it is successful, it will bolster the bearish odds in the short and medium term.

Technical analysis gauge
Daily time frame = Bearish
Weekly time frame = Slightly bullish
*The gauge does not necessarily indicate where the market will head. Instead, it reflects the constellation of RSI, MACD, Stochastic, DM+-, ADX, and moving averages.

Please feel free to express your ideas and thoughts in the comment section.

DISCLAIMER: This analysis is not intended to encourage any buying or selling of any particular securities. Furthermore, it should not be a basis for taking any trade action by an individual investor. Therefore, your own due diligence is highly advised before entering a trade.

Komen:

NVIDIA erased nearly all the profits it gained after yesterday's earnings report.

Komen:

Over the weekend, the Chinese regulator announced the reduction of duty on stock trades to boost investor confidence. The regulatory response seemed to work initially as the Chinese stock market opened far higher from Friday’s close. However, before the opening of the European stock market, Chinese indices erased much of their early gains.

Illustration 1.04

Illustration 1.04 shows the daily chart of CSI 300 (the 300 A-share stocks traded on the Shanghai and Shenzhen stock exchanges). After the regulator’s response, the index opened up approximately 5.5% from Friday’s close.

Komen:

Many technical factors turned relatively bullish in the past few days. But the relief in the Chinese stock market seems to start stalling. Therefore, we think it would be proper to stay out of the market for now (rather than going long already). Alternatively, one can enter a short position with a breakout below $4,500 and put a tight stop-loss above this level.