King Nvidia Technicals Will Determine The Stock Market Direction — Overreaction To ASML Earnings

To gain an edge, this is what you need to know today.

Stock Market Direction

Please click here for an enlarged chart of NVIDIA Corp NVDA.

Note the following:

• This article is about the big picture, not an individual stock. The chart of NVDA stock is being used to illustrate the point.
• The chart shows that after a strong rally NVDA stock entered the resistance zone.
• The rally was triggered by Jensen Huang's comment that the demand for Blackwell was insane.
• The chart shows that NVDA was not able to penetrate the resistance zone.
• The chart shows when NVDA started backing off from the resistance zone, aggressive selling came in.
• The chart shows that NVDA is now below the bottom band of the resistance zone but still considerably above the mini support zone shown on the chart.
• RSI on the chart shows that NVDA stock had become extremely overbought. Overbought stocks tend to pullback. This is exactly what happened. The chart shows the pullback has relieved the extreme overbought condition.
• The chart shows that the volume on the pullback was not low. This indicates that investors should not dismiss this pullback.
• In addition to the technical reason for the pullback, there is a fundamental reason. The fundamental reason is earnings from Dutch semiconductor equipment company ASML Holding NV ASML. ASML has an almost monopoly on extreme ultraviolet lithography equipment needed for manufacturing Nvidia's chips. ASML stock fell 16% on the heaviest volume in 10 years. The big disappointment in ASML earnings was that ASML is forecasting 2025 sales of 30B – 35B euros vs. consensus of 35.8B euros.
• In The Arora Report analysis, the reaction in NVDA stock to ASML's forecast is an overreaction.  ASML is seeing strong AI demand. The weakness is from other chip segments.  
• It is important to note that the demand for Blackwell is so strong that Nvidia is fully booked for the next 12 months.  
• To a large degree, what happens to NVDA next will determine the fate of tech stocks until big tech earnings come along.  If NVDA stock breaks above the resistance zone, it will be positive not only for tech stocks but for the entire stock market.
• Most semiconductor stocks have been hit. Semiconductor bears are questioning the staying power of the semiconductor rally.
• Among earnings of note, Morgan Stanley MS reported earnings better than the consensus. MS earnings are important because MS has large investment banking, trading, and wealth management businesses. Previously Goldman Sachs Group Inc GS, JPMorgan Chase & Co JPM, and Bank of America Corp BAC also reported good earnings. This indicates that the fundamentals of the financial sector are strong. As most investors are focused on tech, prudent investors should have some diversification in the financial sector.  As full disclosure, JPM and BAC are in The Arora Report’s ZYX Buy Core Model Portfolio. Bank ETF SPDR S&P Bank ETF KBE is in The Arora Report’s ZYX Allocation Core Model Portfolio.
• We have been sharing with you the rising yields on long bonds. Now, it is spilling into mortgage rates. Mortgage rates hit the highest since August.  Mortgage refinancing demand fell 26% week-to-week. Refinancing is very sensitive to interest rates.
• Yesterday, we shared with you that Alphabet Inc Class C GOOG was going nuclear to obtain power for AI data centers.  Amazon.com, Inc. AMZN is now signing an agreement with Dominion Energy Inc D to explore developing a small modular reactor near North Anna nuclear station.

U.K.

In the U.K., new data shows that inflation is running below 2% for the first time since 2021.

• CPI came at 0.0% month-over-month vs. 0.1% consensus.
• CPI came at 1.7% year-over-year vs. 1.9% consensus.

Historically, the U.K. has preceded the U.S. by several months. For this reason, it is important to pay attention to U.K. economic data.

Magnificent Seven Money Flows

In the early trade, money flows are positive in NVDA and Tesla Inc TSLA.

In the early trade, money flows are neutral in Amazon.com, Inc. AMZN and Alphabet Inc Class C GOOG.

In the early trade, money flows are negative in Apple Inc AAPL, Meta Platforms Inc META, and Microsoft Corp MSFT.

In the early trade, money flows are neutral in SPDR S&P 500 ETF Trust SPY and Invesco QQQ Trust Series 1 QQQ.

Momo Crowd And Smart Money In Stocks

Investors can gain an edge by knowing money flows in SPY and QQQ.  Investors can get a bigger edge by knowing when smart money is buying stocks, gold, and oil.  The most popular ETF for gold is SPDR Gold Trust GLD.  The most popular ETF for silver is iShares Silver Trust SLV. The most popular ETF for oil is United States Oil ETF USO.

Bitcoin

Bitcoin BTC/USD bulls are excited.  Bitcoin gurus are proclaiming that this time bitcoin is going to breakout and rocket to $100K.  Bitcoin is trading above $67K as of this writing.

Protection Band And What To Do Now

It is important for investors to look ahead and not in the rearview mirror.

Consider continuing to hold good, very long term, existing positions. Based on individual risk preference, consider a protection band consisting of cash or Treasury bills or short-term tactical trades as well as short to medium term hedges and short term hedges. This is a good way to protect yourself and participate in the upside at the same time.

You can determine your protection bands by adding cash to hedges. The high band of the protection is appropriate for those who are older or conservative. The low band of the protection is appropriate for those who are younger or aggressive. If you do not hedge, the total cash level should be more than stated above but significantly less than cash plus hedges.

A protection band of 0% would be very bullish and would indicate full investment with 0% in cash. A protection band of 100% would be very bearish and would indicate a need for aggressive protection with cash and hedges or aggressive short selling.

It is worth reminding that you cannot take advantage of new upcoming opportunities if you are not holding enough cash.  When adjusting hedge levels, consider adjusting partial stop quantities for stock positions (non ETF); consider using wider stops on remaining quantities and also allowing more room for high beta stocks. High beta stocks are the ones that move more than the market.

Traditional 60/40 Portfolio

Probability based risk reward adjusted for inflation does not favor long duration strategic bond allocation at this time.

Those who want to stick to traditional 60% allocation to stocks and 40% to bonds may consider focusing on only high quality bonds and bonds of five year duration or less. Those willing to bring sophistication to their investing may consider using bond ETFs as tactical positions and not strategic positions at this time.

The Arora Report is known for its accurate calls. The Arora Report correctly called the big artificial intelligence rally before anyone else, the new bull market of 2023, the bear market of 2022, new stock market highs right after the virus low in 2020, the virus drop in 2020, the DJIA rally to 30,000 when it was trading at 16,000, the start of a mega bull market in 2009, and the financial crash of 2008. Please click here to sign up for a free forever Generate Wealth Newsletter.