Since the beginning of 2015, NVIDIA Corporation (NASDAQ: NVDA) has been the hottest stock in the entire S&P 500. NVIDIA shares are up more than 410 percent over the last two years, but the tech darling may have recently lost its mojo.
After peaking at an all-time high of $119.93 in December, NVIDIA made a sharp reversal and has since dipped as low as $99.38.
For traders trying to decide whether the NVIDIA pull-back is over, there are two bearish technical signs in the stock’s chart that indicate things may get worse before they get better.
The celebration of a new high in late December didn’t last long for NVIDIA bulls. On the same day NVIDIA set its record, the stock sold off hard on its heaviest daily volume in more than a year and finished the day in the red. In the process, NVIDIA formed a textbook bearish technical chart pattern: the bearish engulfing.
A bearish engulfing pattern is formed when a white candlestick is followed immediately by a larger black (or red) candlestick that completely engulfs the previous day’s candle. NVIDIA formed the pattern between Dec. 27 and 28. Unfortunately for bulls, the pattern typically indicates a stock has peaked in the near-term.
Another bearish indicator in NVIDIA’s chart is the gap the stock formed in November when it jumped from a Nov. 10 close around $68 to a Nov. 11 open above $79. The stock continued higher from there — never filling the gap in the $73 to $78 range.
Stocks have a tendency to retrace their moves to fill in gaps over time. If NVIDIA fills its November gap, the stock could head back to $73 before it ever approaches another all-time high.
While an additional 28-percent downside from current levels may seem like a steep drop, it’s important to remember that $73 represented NVIDIA’s all-time high as recently as two months ago.
The first sign NVIDIA could be headed for a gap fill would be a dip to new 2017 lows below $100. Of course, if the stock bounces to new highs above $120, the gap fill is completely off the table.
If NVIDIA does take a turn for the worse in coming weeks, there is reason to think it wouldn’t dip much lower than $73. Gap-fill stocks often bounce back strongly after the gap fill is complete. In addition to support at the bottom of the gap, the stock’s long-term trend line support is also in the $73 region at the moment. That line will continue to rise in time and could provide support for the stock at a level above $73 in weeks to come.
Disclosure: the author holds no position in the stocks mentioned.
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