NVIDIA Corporation (NVDA) stock has booked outstanding returns so far in 2017, more than doubling in price despite equally dramatic 2016 gains. However, it is almost to time to lock in at least partial profits because the stock is nearing an intermediate sell signal that could yield several months of lower prices while shaking out complacent shareholders and working off extremely overbought technical readings.

The PHLX Semiconductor Index (SOX) is now trading within 20 points of the 2000 bubble high, predicting that chip stocks will soon enter a period of underperformance that could extend well into 2018. Group leadership is especially vulnerable to this projected downturn because that is where most institutional capital has been allocated. (See also: SOX Semiconductor Index at 17-Year Resistance.)

NVIDIA stock is acting poorly near the recent rally high but has set off no sell signals. That will change if it breaks two-month channel support near $210, which will then favor testing at $200. Price action could easily end 2017 at or near that level or continue narrow range-bound action into January 2018, when capital gains tax selling pressure comes into play. NVIDIA shares fell 20% in the first four months of this year, weighed down by similarly bearish seasonality.

NVDA Long-Term Chart (2007 – 2017)

 

A long-term uptrend topped out at $39.67 in October 2007, giving way to a steep decline that reached a four-year low at $5.75 following the 2008 economic collapse. A bounce into 2011 stalled at the .618 Fibonacci sell-off retracement level, generating renewed downside that held well above the 2008 low. The stock held within those relatively narrow boundaries into the second half of 2015, when it finally broke out, reaching the 2007 high in May 2016.

A larger-scale breakout then set into motion, attracting a sizable momentum crowd seeking to buy high and sell even higher. The uptrend went ballistic in the second half of the year, lifting the stock into a major market leadership role while doubling in price between July and December. The rally paused when the calendar flipped into January 2017, with shareholders closing out positions to incur capital gains tax liability. Many folks, including the undersigned, made unwise topping calls at that time, wrongly believing that the powerful advance had come to an end.

The intermediate correction into April carved a broad bull flag pattern that broke to the upside in May, setting off a renewed uptrend that has held like glue to 50-day exponential moving average (EMA) support for the past seven months. The powerful rally stalled in the $190s in mid-September, finally ejecting above the psychological $200 level at the end of October and lifting to an all-time high at $218.67 a few sessions later. (For more, see: NVIDIA Gets a Price Target Boost From RBC, Again.)

NVDA Short-Term Chart (2017)

 

The stock entered a broad rising channel (red lines) in June 2017, reversing at channel resistance earlier this month. It has also carved a smaller-scale channel (blue lines) since September, roughly aligned with sell-off lows since that time. The most recent downturn has brought this level into play once again, with a decline through $210 opening the door to a deeper slide that could test the 50-day EMA at $200 as well as longer-term channel support at $188.

That decline would also set off a bearish weekly stochastics crossover, predicting at least six to ten weeks of relative weakness. Even so, the bullish long-term outlook will remain fully intact as long as support in the $180s holds and could offer a low-risk buying opportunity in the coming months. However, many shareholders may be unwilling to sit through a decline that could extend another 20 to 25 points. (See also: Cryptocurrencies May Boost NVIDIA by 18%: RBC.)

The Bottom Line

NVIDIA has posted outstanding gains so far in 2017 but is now technically overbought while the broad semiconductor sector nears major resistance that could trigger a steep reversal. Shareholders unwilling to hold through an intermediate correction may wish to take profits, seek options protection or place relatively tight stops to protect hard-earned profits. (For additional reading, check out: NVIDIA and GE to Bring AI to CT and Ultrasound.)

<Disclosure: The author held no positions in the aforementioned securities at the time of publication.>

Want to learn how to invest?

Get a free 10 week email series that will teach you how to start investing.

Delivered twice a week, straight to your inbox.