I’ve been really bearish on the market for a few weeks now. Even when the market bounced into and after the Fed meeting, I understood that the biggest bounces come in bear markets or in times of high volatility.

I saw some really weak market internals that remain and decided to cut most of the positions in my portfolio. Not only that, but I wanted to get short some stocks into the market bounce as I didn’t believe the market would continue higher for long. 

Here is a note from a few weeks back:

“I believe that there is a flight to safety going on right now, which is why so much money has been going into AAPL the last few days. Without broad participation of stocks in this rally, I believe we could be in for much more volatility and thus falling stock prices ahead.”

So I decided that the best way to play the upcoming market weakness was to get short a growth stock. I did this by buying puts in NVDA. You can read about the call from a few weeks ago here.

Here is how the trade worked out:

NVIDIA Corporation (NVDA) operates as a visual computing company worldwide. It operates in two segments, Graphics and Compute & Networking. The Graphics segment offers GeForce GPUs for gaming and PCs, the GeForce NOW game-streaming service and related infrastructure, and solutions for gaming platforms; Quadro/NVIDIA RTX GPUs for enterprise design; GRID software for cloud-based visual and virtual computing; and automotive platforms for infotainment systems.

Due to the chip shortage and NVDA’s competitive advantage in Graphics chips, NVDA has been struggling to meet customer demand, such as the popularity of its products. NVDA graphics cards are used for gaming, bitcoin mining, AI, and autonomous driving solutions. Since October, NVDA is up over 50% from a price of $200 to over $300 as I write this. 

NVDA is a high-growth, high Beta market stock. High Beta means that NVDA will usually move much more than the indexes, whether it is up or down, similar to how TSLA trades. Thus, if the market turns bearish, which I think it might soon, NVDA is one of the stocks with the most downside due to its significant range and large momentum moves. 

Technicals

The idea was that I would slowly scale into this trade if it moved against me as I anticipated to have a larger position at a better average price. This is all premeditated so that I have the best price possible for the trade and am at the same time fully in control of my risk.

As you can see from the chart above, I was shorting into resistance and added to my position as per plan. As the market rolled over and so did NVDA I scaled out of the trade into my 280 target and a significant area of prior support. 

Bottom Line

I was bearish on the market. I believed that the SPY was being held up by AAPL due to a flight to safety trade into the new year. If market volatility was to return, which it did, I expected to see the entire market selling off again. This is why I was high cash and focused on protecting the downside. 

If a market selloff was to occur, NVDA would probably be one of the stocks with the most downside, given its high Beta momentum nature. I initiated a short position and added to it. Although the trade initially went against me, I expect the resistance around these levels to hold and a selloff in NVDA to occur over the next week or two. This is exactly what happened.