Brutal Beating for AI Stock

Brit Ryle

Posted April 19, 2024

There’s a stock market rule that says all gaps must get filled. 

A gap is something you see on a stock chart when an index or stock ends a trading day at one level and then starts trading the next day at a higher price. It literally creates a gap on the price chart.

For an individual, a gap on the chart often occurs after a good earnings report. Say the stock finished trading on the day that earnings will be reported at $50. Earnings are great, and the stock starts trading at $52 the next day. 

Investors may think “Wow, that company is doing much better than people thought. The stock is probably worth more than $52 so I will buy it at $52.”

There’s another stock market rule that says you shouldn’t let a win turn into a loss. So if that stock eventually sells off, the minute it goes below $52, investors often start selling to cut their loss. 

The furious rally we’ve seen for the stock market has been driven by very good earnings reports from a lot of companies, especially AI and chip companies. There are gaps all over the place. Amazon (NASDAQ: AMZN), AMD (NYSE: AMD), Meta (NASDAQ: META), Nvidia (NASDAQ: NVDA)…

There are a lot of charts out there with gaps. I’m not going to weed through all of them. Fortunately, I don’t have to. I can show you the most important gap, with one chart:

That’s a 3-month chart of the S&P 500. I circled the gap it made back in February. You can see that the cascade of red days has now filled that gap. 

Now, just because a gap has been filled does not absolutely, 100% gare-on-tee that the index or stock will rally. There are no absolute 100% gare-on-tees in the stock market. But I’ll tell you: the odds of bounce are now a hell of a lot better than they were yesterday. 

Blood In The Streets

I know it’s not easy to buy stocks when things are scary. And the potential for escalation between Iran and Israel is scary. The possibility that this sell-off isn’t done yet and you could lose money is also scary. But then, that’s also why stocks are cheaper than they were a few weeks ago. 

AMD (NASDAQ: AMD) closed a gap that was created on January 12-13 today.

But if you really want to see something scary, check out this chart of SuperMicro Computer (NASDAQ: SMCI)…

This is about as merciless a beating as you will ever see. Shares are down $200 bucks, over 20% just today. A gut punch. And I’ll admit it’s making me a little queasy just looking at it. 

But that big gap is now filled. The weak hands have been shaken out. Probably some fairly strong hands too. 

Mind That Gap 

Apparently, SMCI usually offers a preliminary look at its earnings numbers when it announces the date it will release earnings. The company set April 30 for its report but skipped the preliminary look at what those earnings will be. Investors are freaking out, scared the company is hiding a nasty surprise. 

At the start of trading today, SMCI’s forward price-to-earnings was 30. Now it’s 23.5. That’s still a little expensive for a stock that has suddenly raised some questions about its growth. 

I could see buying a couple of call options on AMD and maybe catch a bounce. But I won’t be doing anything but watching with SMCI, and I might have to look away if this sell-off gets worse.

 Briton Ryle

Chief Investment Strategist
Pro Trader Today