NVIDIA, Corp. (NVDA) outperformed major indices and the broad tech universe in 2016, more than tripling in price to a lofty high in triple digits. However, the stock has struggled since the calendar flipped to January and is now trading in the red for 2017. The sideways pattern carved since December could signal a major top, but it’s too early for short sellers to do victory laps because remaining bulls are fighting hard to reinstate the uptrend.
Stocks that lead the market in one year often lag badly in the following year, following the long-held market wisdom that the bigger the move, the broader the base. In this incarnation, NVDA’s bullish long-term story remains fully intact but may be discounted in the current stock price, raising odds it will head into an intermediate correction that tests last year’s outsized gains.
NVDA Long-Term Chart (1999-2017)
The company came public at $1.83 (post four splits) in January 1999, right at the height of the tech bubble. It established support just below $1.40 and took off in a strong uptrend that continued into the January 2002 high at $24.22, ahead of a steep decline that coincided with the final and most brutal phase of the Dot.com bear market. Selling pressure finally ended in October at a 3-year low, just one point above the 1999 low.
The stock carved a double bottom reversal into 2005 and took off in a strong trend advance, lifting in multiple rally waves that reached $39.67 in October 2007, right at the bull market top. It held up relatively well during the 2008 economic collapse, losing more than 80% of its value but holding above the 2002 and 2004 lows. A two-legged recovery into 2011 came up short, stalling at the 50% bear market retracement level in the mid-20s.
Volatility and interest then died, dropping price into a 15-point range that persisted for more than four years, ahead of an enthusiastic rally driven by growing interest in virtual reality gaming technologies. The stock exploded through resistance at the 2007 high in May 2016 and went parabolic, lifting in a high volume uptick that posted minor pullbacks into its December high at $119.93.
NVDA Short-Term Chart (2015-2017)
The stock eased into a shallow uptrend in 2012, with the weak angle of attack continuing into July 2015 when price rate of change began to escalate. It rallied above the 2011 recovery high in October, setting off a round of buying signals, but the broad market decline into the first quarter of 2016 limited gains until February when it ejected into a market-leading breakout and trend advance.
A Fibonacci grid stretched across the 2016 rally places a continuation gap at the 50% level, raising odds the uptrend has now come to an end. More importantly, a February breakout attempt failed, triggering a decline that eventually found support in the mid-90s while the subsequent bounce got sold aggressively at the 50-day EMA. This increases danger substantially because a selloff to the red line will now complete a bearish head and shoulders top, with a measured move target at $70.
On Balance Volume (OBV) tracked price higher in 2016, signaling major institutional and retail sponsorship. It peaked in December and failed to post a new high in February, even though the stock hit an all-time high at $120.92. The indicator is now pointed lower, but there’s no evidence that shareholders are abandoning ship or taking profits. This marks a two-edged sword because, while offering a tailwind, it also denotes a huge supply of bagholders if the stock breaks support.
The Bottom Line
NVIDIA is trading in the red for 2017 after failing two attempts to break resistance at $120. Price action during this period has drawn the outline of a potential topping pattern, telling observant market players to focus on price action in the mid-90s, where head and shoulders neckline support may determine the stock’s long-term fate.
<Disclosure: the author held no positions in aforementioned stocks at the time of publication.>