Samwise Quick Reference Handbook
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Just out of curiosity, was the May NVDA deeply overbought period an outlier? The stock price consolidated while the RSI was above 70/80 and didn’t actually pullback until a bit later after the price increased. Is there a chance that happens here as well?
Not an outlier at all. That’s how it often goes actually. With the QQQ, peak at overbought conditions doesn’t necessarily lead to a peak in the price. In fact, it’s like 70-30. More often than not, the price peak is much higher than the RSI peak.
With Nvidia, it’s less often. in most cases, a peak in the RSI does usually correspond to a peak in price.
The RSI is a read on momentum. So peak RSI technically is supposed to mean that momentum is very strong which in turn means more upside. While declining RSI with rising price means negative divergence and that’s when you get a peak in price.
But RSI can also just be read as an overbought indicator as we’re doing right now.
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Anyway for Nvidia in may, it’s initially peak overbought condition was at $130 and it reached as high as $137 (on a second peak) before pulling back 10-points.
So it didn’t really continue to just rise indefinitely or anything like that. But if we had gone short at the first peak ($130) we would have made little to money on teh short trade as Nvidia bottomed at around $127. With decay and execution risk, we may have gotten out even to up slightly.
Here’s a smart way to have played it though. So sometimes Nvidia peaks right at its peak RSI. Other times it continues higher right?
So here’s what we could do and I’ve thought about doing this earlier today. Still thinking about it now.
What we could do is buy a put or put-spread right here at $156 to hedge against hte possibility of Nvidia peaking right here at $156. It could easily happen. We could see a top now that the stock is so overbought. So we buy position #1 at $156.
In Baratheon, that might be a $2,000 position.
Then if Nviida does continue higher to $160 as we expect it might, we buy position #2 for $2,000 at $160. we may even just buy a different put or put-spread.
By the time it reaches $160, it’ll peak. Whether at $159 or $162, it’s going to top somewhere in that area because it will have simply gone too far at that point near-term.
Now suppose Nivida pulls back from $162 down to $153 or something.
The first position might not make much and/or we might exit at even. But the second position will produce the returns.
So the idea is to make our profit on position #2 while position #1 allows us to participate if the stock were to peak immediately.
The plan would be to exit position #1 at even or as close to even as possible and produce profits on position #2.
So we might do that later today. We might buy a partial or 1/2 position here. Buy a different one down the line. Then close out both on the eventual pull-back.
Do you see the QQQ pushing to $600 based on the rally momentum?
So we’ve outlined our analysis on the QQQ over the last few weeks. There’s nothing that we can see right now that would suggest a breakout run to $600. Here’s how things would have to play out for that to happen (as we noted yesterday).
The QQQ is eventually going to peak near-term. Whether at $550 or $560, we’ll soon see a peak. The QQQ will then sustain a 3-5% pull-back from $550 to $530 or $560 down to $540. Both situations make perfect sense.
From there, the QQQ will then retest its highs at $550/$560. If it takes out the highs, then at that point the probability of a run to $600 drastically increases. If it fails to take out the highs — as is very often the case at this point — then the QQQ sustains a correction.
That’s the layout right now.
There’s no way to know which way this will swing until we get a (1) pull-back; and (2) retest of the highs.
That set-up needs to play out first. From here, it’s literally just a guess. Even if backed by all types of fundamental thoughts about the economy, it’s a guess.
No way to know right now. but if we see the QQQ pull back, retest the highs and take them out — as we saw happen after the covid rally — then that’s a big indication that the QQQ wants to push toward $580-$600 zone.
If we are unable to participate in spread purchases. Would it be wise to hold the last half of NVDL’s in spite of decay, or do you think some call buying options will also present themselves after a pull back?
So we’re going to the sidelines because capital preservation has to come first. We can always find opportunity to make money. It’s still uncertain whether we’ll even buy any calls or spreads in Arryn/Stark.
We may just choose to sit it out. Really, at $160, we’ll be able to buy back at those levels regardless of what follows.
Hi Sam,
when you are designing your strategies, can you please hypothetically lay out what you would do if you were unable to do spreads? That would be very informative.
Thank You
Hi Sam,
regarding the baratheon targaryen portfolios,
may I know why single option 150 puts nvda?
instead of targeted put spread 150-140?
since you are planning to close out the trade after a 10-point pullback
It’s a better return short-term. You get a higher percentage gain on a 10-point drop on the $150’s than on the put-spread. The put-spread is probably better if go to a lower strike and hold it through correction.
Hello Sam,
If I understand correctly, in the short term, NVIDIA will seek support at $160 and then correct by 12 to 20 points to $140.
Then climb back above $160, or even $200?
It seems to me that the probability of the following scenario is higher, given that, as a reminder, we expected NVIDIA to revisit the $120 support after the $140 support, but it sought support at $160 without a single drop…
It seems to me that anything that doesn’t happen is saved for the next drop, so NVIDIA should fall even further given that it has continued this rally almost continuously since April 16.
1) NVIDIA will seek support at $160
2) Then correct by 12 to 20 points to the $140 support level
3) Rally to $160 in the short term
4) Correction of 35 to 40 points to reach the $120 area or even a sharper correction to the $103-$104 support level within two months at the latest.
Indeed, historically, corrections appear within one or two months of a small 12 to 20 point drop into overbought territory.
This therefore puts us at high risk of a correction between now and the end of August.
5) Strong COVID-style rally to $160-$200 between the end of August and January 2026
Best
Karl
So just to clear up terminology. Support is something that is underneath a stock. For example, $100, $114, $120, $130, and $140 are all major support levels for Nvidia.
Resistance is something above the stock that holds it back. $160 is resistance for Nvidia.
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Our expectation is that Nvidia will run into problems at $160 resistance. The MOST LIKELY outcome is a 10-point pull-back. That’s all we can count on. A drop from $160 down to $150. That’s it.
Now historically, we’ve seen larger pull-backs on the same overbought. Historically, Nvidia can easily pull-back $12-20 and it would be normally. Totally normally. If Nvidia were to pull-back to $140 after reaching $160, that would make sense. But that doesn’t mean it’s a high probability or that you should count it. We’re only counting on 10-points pull-back.
The fact that we’ve seen multiple legs up without larger pull-backs yet does increase the chances we get a larger pull-back here. Like I said, historically, we’ve seen multiple $12-20 point pull-backs off deeply overbought like this. Problem is that we also see 8-10 points pull-back as well. There’s no way to know until it happens. But we can really only count on 10-points.
If the Covid-style rally happens, it’s happening now. Not later. Remember, with the Covid rally, the QQQ made new all-time highs right around Day 57 just like we’re seeing right now. The QQQ pulled back sharply 6%. It then rallied to substantial new highs right after. That is when the parabolic rally started.
The total rally lasted from March 2020 to August 2020 (114 days total). There was no correction or break or anything that at all.
If we have a parabolic run here, it’s going to happen between July and September. But the probability of that is still low. And with Covid we saw a big pull-back first off the highs.
This rally doesn’t have to follow the same playbook, but we have seen multiple past cases where parabolic rallies happen right off of the highs. It’s the new all-time highs that always triggers a parabolic run. So it’s new all-time highs, sharp pull-back, retest of the highs and then either a correction or a parabolic run.
We’ll know by Day 70 whether the QQQ is making an attempt at a parabolic run. After a big pull-back and then retest of the highs, we’ll get a sene of what the market is thinking at that point.
Thanks, Sam, for the clarification. But ultimately, does the correction no longer seem to be relevant to you? For the 70th day, that would be July 22nd, so it makes sense, given several analyses on the likelihood of a correction from then on. Another story to follow on July 6th and 7th with the BRICS summit and the anti-Swift USD project.
When stocks go parabolic, do they tend to ignore being overbought?
Yes. But we’re not quite there yet. We still need to go through the breakout > new highs > pull-back > retest process first.
So far this is all normal and anticipated. Remember, our expectation for the QQQ on breakout above $540 is $550-$560 for a peak. Then the QQQ will pullback, retest the highs and from there it’s either a correction or a breakout toward $580+.
Oh, yeah that’s what I expect to happen. I was just curious because I know you’ve mentioned before that overbought sometimes gets ignored as the market climbs higher and (with my limited understanding of RSI) even if a pullback to 530 reached oversold, a 50-70 rise to 580-600 seemed like it would reach overbought before the peak