NVIDIA Corporation (NVDA) shares sold off more than 5% in the first hour of Friday's U.S. session, hitting a four-week low at $153.65 after the company reported a strong quarter but disappointed the momentum crowd with lower-than-expected guidance. The decline reinforces a three-month trading range between $138 and $175 while increasing the odds that the graphics giant is grinding through the middle stages of a long-term topping pattern.

The stock traded as low as $150.20 in pre-market action, forcing a supply of weak-handed shareholders back to the sidelines. Modest technical improvement since that time has eased bearish sentiment, but it will take a very strong close to draw fresh buying power into this market leader. That seems unlikely given the broad retreat generated by growing geopolitical risk. (See also: NVIDIA Shares Fall as Investors Fret Over Data Center Growth.)

It has been unwise to bet against NVIDIA in 2017 despite 2016's parabolic uptrend, but gains have slowed considerably in recent months, with the stock now trading at the same level it did in early June. That is not an issue for long-term shareholders, but the momentum crowd is also holding positions while keeping one finger on the exit button at all times. An orderly decline could turn into a full-scale rout if this group tries to exit positions at the same time.

NVDA Weekly Chart (2011 – 2017)

 

A post-bear market bounce ended at the .618 Fibonacci sell-off retracement level in the mid-$20s in 2011, giving way to a long-term rounded correction that returned to resistance in the second half of 2015. The stock broke out into the end of that year and took off in a vertical trend advance fueled by the company's strategic advantages in the growing virtual reality market. The rally continued its incredible trajectory into the end of 2016, posting greater than 300% annual gains. (For more, see: Figuring Out What NVIDIA Is Really Worth.)

NVIDIA shares pulled back in a bull flag pattern in the first quarter of 2017, undercutting the 50-day exponential moving average (EMA), and took off in a May rally wave that reached $168.50 in early June. Slightly higher highs in July and earlier this week failed to attract significant buying interest, while the bearish post-earnings reaction has dropped the price back into a broad trading range that could eventually yield a trend reversal.

Weekly and monthly stochastics oscillators will remain in buy cycles when the trading week comes to an end, indicating that bulls are still in charge. As a result, bearish observations serve as warning signs and red flags rather than sell signals that demand immediate action. However, that will change when the weekly indicator crosses into a sell cycle because the technical dominoes could then fall and generate long-term sell signals. (See also: NVIDIA Stock Risks Falling Below Key Support.)

NVDA Daily Chart (2016 – 2017)

 

The trading range between the July low at $138 and August high at $175 now becomes the dominant technical feature because a breakdown could drop the stock into the unfilled May 10 gap between $103 and $114. There is plenty of room for bulls and bears to get it wrong within this range-bound pattern, especially if price action fails to hold the 50-day EMA at $155. Shorter-term resistance now lies between $162 and $165 following the breakdown through the July 27 swing low.

The on-balance volume (OBV) indicator looks nearly bulletproof, grinding sideways close to the rally high. However, the stock has posted more than 100% of its average daily volume in the first hour of Friday's session, telling us to watch for a downturn that will gain significance if it carries through the July low (red line). While that is unlikely to happen in one day, the decline could easily continue into the coming week, especially if geopolitical factors continue to weigh on the broad tape. (For more, see: NVIDIA's Way to Win AI Chip Share: Give Them Away.)

The Bottom Line

NVIDIA is struggling on Friday morning after a sell-the-news reaction dropped the stock more than 5%. It has now dropped back within the prior trading range, denying breakout buyers while raising the odds that it will carve a longer-term topping pattern. (For additional reading, check out: Is NVIDIA Too Dependent on Bitcoin?)

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

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