While stocks can trend higher or lower for long periods of time, they will occasionally take a breather. That can provide a buying opportunity for investors, particularly for great companies pulling back.
Over the long haul, buying a great company on a drop can lead to better returns than buying high and hoping to sell higher. Traders who wait for companies to come off of overbought conditions get the reward of market outperformance for their patience.
Chipmaker Nvidia (NVDA) has been a runaway winner this year. But shares have now pulled back more than 10 percent from their all-time highs and slid under their 50-day moving average.
The stock is no longer overbought, and a few more down days could even lead to it being oversold in terms of its relative strength.
That suggests that we’re nearing a buying window for investors who feel that they’ve missed out on the trade.
Action to take: Investors should look to buy shares at or under $400. That would be closer to a 15 percent pullback from the high, and at oversold conditions. A few more rough days in the market should do it. Nvidia does pay a small dividend, but the long-term upside potential looks more attractive.
For traders, the November $460 calls, last going for about $35.50, could drop further in the coming days. Traders should look to buy when the stock hits oversold levels as a rebound play, to leverage a move higher into mid-double-digit returns.
Disclosure: The author of this article has no position in the company mentioned here, but may trade after the next 72 hours. The author receives no compensation from any of the companies mentioned in this article.