• Nvidia erases a significant part of its 3-day slide

• Investors are bullish as AI keeps delivering earnings

• Subdued volatility hints low odds of a broader correction

 

Nvidia’s roller coaster ride moves markets

The last few days have been eventful for the US stock market mainly because of Nvidia’s volatile moves. The AI darling lost over $430 billion in market capitalisation in three successive sessions starting from last Thursday, marking the largest three-day loss in the stock market’s history and dragging both the S&P 500 and Nasdaq lower.

Surprisingly, there was no clear catalyst behind this slide besides profit taking and portfolio rebalancing as we are drawing closer to the end of the quarter, which also marks the first half of the year. On Tuesday, Nvidia recovered significant ground, sparking gains in the broader big tech clan, while the chipmaker is on track to extend its rebound on Wednesday.

Such an immediate buy-the-dip reaction melted away fears of a slowdown over AI demand as that latest pullback was perceived more as a bargain rather than a threat. In a nutshell, despite the exponential rally to consecutive all-time highs, it seems that investors are poised to keep buying AI-related stocks as long as they keep delivering high quality earnings.

What could derail this rally?

Although the short-lived tech selloff caused an uptick in volatility, its magnitude was so small that the CBOE Volatility Index (VIX), Wall Street’s fear gauge, remains below its 50-day SMA and within breathing distance from four-year lows. This means that investors have not been actively positioning for a pullback despite the overstretched rally and hefty valuations.

The absence of fear could be mainly attributed to the remarkable strength of the US economy as well as the consecutive stronger-than-expected quarterly corporate results, mainly from tech companies. Meanwhile, this week’s events served as a reminder that every attempt for a downside correction in the past eight months has been shattered, leading to losses for the bears.

In the current macroeconomic backdrop, it is difficult to bet against US equities’ relentless upside momentum. Hence, the major risk moving forward is an exogenous event that could derail the rate-cut process and spoil the soft-landing scenario.

Technical levels to watch

Despite a minor setback driven by Nvidia’s recent slump, the US 500 stock index has been recording consecutive all-time highs in 2024, repeatedly defying overbought signals. Considering that we are currently trading near all-time highs, the Fibonacci extensions of the latest severe downtrend could provide some potential future resistance areas.

To the upside, the price could test 5,481, which is the 150.0% Fibonacci extension of the 4,817-3,489 downtrend and lies very close to the record peak of 5,520. Even higher, the 161.8% Fibo of 5,638 could prevent further upside.

Alternatively, bearish actions could encounter support at the 138.2% Fibo of 5,324 before the 123.6% Fibo of 5,130 comes under scrutiny.