If you want to own Nvidia Corporation (NVDA​), you need to know how trade a momentum stock. A momentum stock typically has an elevated P/E ratio, a paltry dividend yield and extremely overbought momentum (12 x 3 x 3 weekly slow stochastic).

Nvidia stock closed Wednesday at $209.16, up 96% year to date and in bull market territory at 213.3% above its post-election low of $66.76 set on Nov. 16, 2016. The stock set its all-time intraday high of $212.90 on Nov. 7. Here's my analysis and recommended exit strategy given the stock's strong but parabolic technical momentum. (See also: Why Nvidia's Stock Faces a Growth Crisis.)

Nvidia is the third largest component of the iShares PHLX Semiconductor ETF (SOXX​), which has 30 components and mirrors the Philadelphia Semiconductor Index (SOX). The SOX has been the strongest group of stocks so far in 2017, with a gain of 45.7% year to date, but the index is experiencing an "inflating parabolic bubble" that is approaching its March 2000 all-time high of 1,362.10. The momentum reading for the SOX is 97.16 on a scale of 0 to 100, where the overbought threshold is 80, and a reading above 90 indicates an "inflating parabolic bubble."

Analysts expect Nvidia to post earnings per share between 94 cents and $1.02 when the company reports results after the closing bell on Thursday. Value buyers have no interest in this stock, as its P/E ratio is 60.50 with a dividend yield of just 0.27%. Nvidia provides computer chips for gaming and artificial intelligence applications, which is all the rage these days. The company is well positioned for growth, so traders should look for guidance in the self-driving and machine learning applications, as well as growth in Nvidia's data center business.

The weekly chart for Nvidia

Technical chart showing the performance of Nvidia Corporation (NVDA) stock

Courtesy of MetaStock Xenith

The weekly chart for Nvidia is positive but extremely overbought, with the stock above its five-week modified moving average of $193.62. The 12 x 3 x 3 weekly slow stochastic reading is projected to rise to 92.89 this week, up from 90.87 on Nov. 3, well above the overbought threshold of 80 and well above 90, which I consider an indication that the stock's price action is an "inflating parabolic bubble."

If you are long a stock that appears to be in an inflating bubble, you should always have an exit strategy. My choice is to use a weekly close below the five-week modified moving average as the sell-stop trigger. This average will be rising each week as the stock continues to trade higher.   

Given this chart, my trading strategy is to buy weakness to my quarterly and semiannual value level of $175.77 and $129.45, respectively, and to reduce holdings on strength to my monthly and weekly risky levels of $215.52 and $220.73, respectively. (For additional reading, check out: Artificial Intelligence to Drive Nvidia's Q3 Earnings.)

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