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SMCI Climatic Top

SMCI is one of the biggest gainers of the AI hype. This data centers company which builds servers from scratch, had a massive growth, and saw its EPS raising from 2.5$ in 2021 to expected EPS of 22$ in 2024 and with annual sales of more than 10b$.

Its stock price had a huge move doubling from 44$ to 82$ in 2022 despite the bear market, and then going all the way up to 350$ in mid 2023.

After such a big move it consolidated for about 6 months, before breaking out again last month from 300$ all the way up to 1070$ in one month (260%) and with huge volume.


In the last trading days, there were many signs of a Climax Top:

  1. The stock was up in 18/20 days (7/8 is good enough).

  2. It had a move of 60% in the first 3 weeks after breaking out of the consolidation (25%-50% or more is required).

  3. It had its largest daily points gain since the initial base, on huge volume (FOMO).

  4. It had 3 gaps in a row (breakaway gap, extension gap & exhaustion gap).

  5. It had its largest weekly price spread on huge volume.

  6. It traded 300% over its 200d ma (more than 100% is enough).

  7. It broke over the upper channel.

  8. Analysts gained confidence and gave higher price targets this week (1040).






That was enough for wanting to short the stock before a major correction arrives.

However, shorting such a strong stock is very risky and the probabilities are that you will be stopped out very quickly and lose more than you were willing to.


Buying short dated put options was an effective way to play this top.

Of course, the odds are that you won't be able to time exactly the beginning of the meltdown, however you can position size small in a way that will allow you to take a few shots for a few days.





Day 1: bought put800 at 6.2 and sold back at 4. A -2.2$ loss.

Day 2: bought put850 at 4.2$ and sold at 1.5$. A -2.6$ loss.

Later bought p900 for 4.9$ and p850 for 0.9$ and stayed for another day.

Day 3: bought P950 for 2.1$. Sold at 17.5$ 20 min later. A 15.4$ gain (7R). That sell was for locking-in gains and making sure I won't lose if the stock would reverse up. (Just for the record - at expiration it was worth 147$ :))

Bought P900 for 0.7$ and sold at 30$ 24min later. A 29.3$ gain (42R).

Bought P850 for 0.19$ and sold at 25$. a 24.8$ gain (130R).

Bought P800 for 0.45$ and sold for 1.27$.


Total gain for trades 25K.


This huge R multiplies are since the stock had a trading range from +7% to -20% on Friday. Was that something unreasonable? Not necessarily.

History shows that Climactic moves in stocks tend to end the same, and usually in brutal way.

Another reason that might accelerated the melt down, was that it was an options expiration day. I believe that at least some of the movement up was fueled by speculative retail investors (like in GME or AMC with their reddit groups). They buy small calls on the way up, for example C700 for 1$ (100$) and then when expiration comes, they need to add 70,000$ to exercise the option (which they don't have and/or don't want), so they choose to sell the calls before expiration, which can create a big down pressure.

Add to that the fact that each round number strike (800,850,900,950,1000) had huge open interest, sometimes 5K (like 500,000 shares) where the market makers need to cover their deltas. That was a fuel on the way up, but just as explosive on the way down.


So, what's next for SMCI? History shows that when a stock reaches a Climax top, it needs at least 10-24 months before it can make new highs again.


Last thing to consider is that when a stock that everyone is focused on, makes a top, it could influence sectors that are hot (AI, Chips) and other speculative investments (Bitcoin). So, be aware if the climate changes and more clouds show on the horizon.


Cheers



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