Call it rotation or profit-taking, but some market bulls are backing away from a number of favored pandemic-related names Wednesday. For example, Nvidia Inc. (NVDA) , the chip manufacturer that currently generates most of its revenue from the sale of chips for competitive gaming. It's stock is down sharply. Let's check out a few charts to see if this is a game changing move.
In this daily bar chart of NVDA, below, we can see prices rallied strongly in April and May and turned lower Tuesday with further losses so far Wednesday. Prices did not make a topping pattern or lengthy distribution (selling), so I don't believe a major reversal is in the cards. The slope of the 50-day moving average line is positive, and so is the slope of the 200-day moving average line.
Prices could be considered extended, when compared to the 200-day line so that in itself is a reason for a pullback. Trading volume increased in the second half of May, telling us that buyers came in as prices broke out to new highs. This also tells us that the cost basis of these new longs is also high, which can help explain the pullback.The On-Balance-Volume (OBV) line moved up with prices to a new high and now shows a small decline. The Moving Average Convergence Divergence (MACD) oscillator has narrowed sharply and is now close to a bearish crossover and take-profit sell signal.
In this weekly Japanese candlestick chart of NVDA, below, we can see a possible bearish engulfing pattern. We don't have the whole story and we don't have confirmation, but that is how the chart is shaping up at this point. The 40-week moving average line has a positive slope, but prices look extended above it. The weekly OBV line has been inching higher the past three months, but it is not a new high like prices, so this is a bearish divergence. The MACD oscillator is bullish, but that could change if prices weaken further.
In this Point and Figure chart of NVDA, below, we can see a potential downside price target in the $274 area. The software does not take into account potential chart support nor does it care that prices are below the breakout point around $315.
Bottom line strategy: If you have a relatively high purchase price of NVDA, you should adjust your stop protection so you do not lose money -- you never want to have a winning stock turn into a loser. If you have a low purchase price for NVDA then I think you are probably OK, as I suspect that support around $315 will hold. Keep a close watch.
