Broken Charts, Bullish Analysts: How I’m Trading Data Center Stocks

The market is volatile on Tuesday as it digests a surprisingly mild CPI report, but that report was largely driven by energy prices, which have reversed sharply higher in the last few days.

Investors are now considering Fed Chair Warsh’s comments as he testifies before Congress. His primary focus is that the Fed must take responsibility for inflation and it has the tools to deliver results. Whether this is a hawkish posture suggesting aggressive rate hikes is not clear and the market has not had a strong response so far.

Overall market conditions are in flux and we have a lot of volatility and rotational action to consider. This is not a market that looks ready to trend higher. It is likely going to continue a digestive phase as second-quarter earnings hit. We already saw one landmine this morning when IBM (IBM) surprised with poor guidance and blamed shifts in spending patterns.

The good news is that this chaos will eventually offer great opportunities for patient traders and investors. It takes time for conditions to develop so don’t rush to try to catch dips.

Let’s look at the data center as a group that may offer some long-term opportunities.

The Data Center Trade

The data center and AI infrastructure names have been some of the most profitable stocks in the market over the past year, and right now most of them have broken charts.

TeraWulf (WULF), Nebius (NBIS), IREN (IREN), Core Scientific (CORZ), CoreWeave (CRWV), and Applied Digital (APLD) have all rolled over from their highs. What makes them interesting is the disconnect between the price action and the analyst community, which remains bullish with price targets well above current levels.

That disconnect is exactly the kind of setup that sucks traders into making mistakes.

Broken Charts, Bullish Analysts

The pattern is the same across the group. The stock ran to a high earlier this year, rolled over, and is now well off its peak with a chart that looks broken. Meanwhile, the analysts who covered these names on the way up have kept their buy ratings and their high price targets.

A trader looking at a broken chart and a $40 price target on a $20 stock sees what looks like a gift. It is not a gift. It is a trap, and it is one of the most common traps in the market.

Why Bottom Fishing Fails

I am constantly surprised by how strongly small traders are drawn to bottom fishing in broken names. The logic feels sound. The story is still good, the analysts still love it, and the stock is much cheaper than it was. Why not buy it down here and wait for the recovery?

The problem is that a broken chart tells you the trend has changed and you do not know when it will change back. Catching a bottom means guessing where the selling stops, and that guess usually costs you money because a broken stock can stay broken for months. The stock that is down 40% can easily be down 60%.

Cheap is not a reason to buy. A change in trend is a reason to buy.

The analyst targets make it worse. A high price target on a broken stock gives the bottom fisher a number to anchor on and a reason to hold through further losses. The target was set on the way up and it lags the price action on the way down. By the time the analysts cut their targets, the damage is done.

I was just looking at the price targets of WULF, which is a name that I like. Morgan Stanley raised its price target to $72 on July 8. The stock is now trading around $19.50. That sounds like a compelling buy but the stock is down 6% Tuesday morning.

The Data Center Theme Is Not Going Away

The data center theme is far from dead, however. The AI infrastructure buildout is far from over and these companies are levered to it. The names that supply power and compute to the AI economy are going to matter for years. That is exactly why they will run big if and when they regain momentum.

But the theme is facing real pushback on the growth side. This morning New York became the first state to impose a moratorium on large data centers. Governor Kathy Hochul is signing an executive order halting construction of new facilities over 50 megawatts for up to a year while the state studies the impact on utility bills and the power grid. She also plans to go after the sales tax exemptions these projects have enjoyed.

New York is not alone. There are more than 100 local moratoriums, a dozen state proposals, and a federal bill pending. The political friction against the power demands of AI is building.

That pushback is part of the reason the charts are broken, and it is a reason the bottom is hard to call. When a growth story runs into political resistance, the timing of the recovery becomes even harder to predict.

My Approach

I would not buy any of these stocks right now, regardless of valuation. That is the key point. Valuation does not matter when the trend is broken and the timing of the recovery is unknown. I might take a small tracking position or a quick trade in one if I found it compelling, just to keep it on my radar and stay engaged with the chart. But a tracking position is just a reminder to watch for a potential opportunity in the future.

The goal with these names is not to buy a low. It is to buy when there is a clear change in trend that looks like it can gain momentum. These are stocks that will run big when they come back, so I do not need to catch the exact bottom. I need to catch the turn. Missing the first 15% off the low is fine if it means I am buying a stock that is going up rather than guessing at one that is still going down.

This approach applies to every broken sector, not just the data centers. Let the broken names stay broken. Wait for the trend to change. Buy strength that is confirming rather than weakness that is hoping.

The bottom fishers will keep trying to catch the exact low and they will keep getting hurt. The patient trader waits for the stock to prove that the trend has turned and then moves.

At the time of publication, Rev Shark had no positions in any securities mentioned.