We can use Nvidia to understand a little more about what is happening in the stock market. The Coppock indicator signalled very early here and using the trend line breaks and the moving averages (two out of three ain’t bad) we might well have stayed in until the next trend line break. We would have been on the alert to act on that because of the falling Coppock indicator suggesting that trouble was coming sooner or later.
Now we have a new breakdown from a pattern suggesting this share has further to fall. LikeTesla, Nvidia has been one of the favourites of the long bull market and like Musk it is led by a high-profile charismatic CEO, which in this market has turned from a positive to a negative. We now know that all that charisma was a key factor pumping the shares too high.
Charts are brilliant in helping us to cut through all the noise and see (a) what is really happening and (b) help us to take decisions based on logic rather than emotions like fear and greed. This chart is saying that Nvidia shares could still fall a long way from here.
In this market valuations are like how long is a piece of string. The shares are currently on 40 times expected earnings for the year to 31 January 2023. If that was 20 times earnings would the shares be super cheap. Not necessarily and there is always the risk that the battle against inflation will end, as it has so often in the past, with a recession, in which case nobody will believe those expected earnings numbers anyway.
The best strategy in a bear market is not to hold shares but be on the alert. We need to be on the alert because when markets do turn they can turn very fast. In my hippy days I briefly experimented with LSD (going on trips, man) until I had a bad trip and never touched the stuff again. What I did notice though was the effect as though you were in a whole new place, like being in a theatre and somebody had totally changed the staging. Stock markets are a bit like that; one minute it is all doom, gloom and bear market and then somebody changes the staging and you are in a whole different place. We need to watch for that moment.