NVIDIA Corporation (NVDA) blew away first quarter profit and revenue estimates last week, reporting earnings per share of $2.05 on $3.21 billion in revenues, but a sell-the-news reaction kicked into gear after management warned about declining cryptocurrency sales and more stable GPU pricing. The stock failed a breakout above horizontal resistance at $250 three sessions later, handing control to bears for the first time since early April.

The decline unfolded at the top of a rising channel going back to the January high, reinforcing that positive but often frustrating price structure. Odds for a pullback into channel support between $215 and $220 have now risen sharply, raising the prospect of 10% to 15% downside from this week's action in the $240s. While long-term shareholders can handle that downturn without losing sleep, position traders may be exposed to large losses. (See also: NVIDIA Reports Earnings Setting an All-time High.)

NVDA Long-Term Chart (2002 – 2018)

The stock topped out in the low $20s in 2002 and turned sharply lower, finally returning to resistance in 2006. It completed a cup and handle breakout a few months later, lifting to $39.67 in 2007, ahead of a downtrend that hit a four-year low in the single digits in November 2008. A bounce into 2011 ran out of steam at the .618 Fibonacci sell-off retracement level, with that barrier holding in place until a 2015 breakout.

The subsequent advance reached the 2007 high in the second quarter of 2016, yielding a more powerful breakout that attracted intense momentum buying interest. The stock more than tripled that year, rising to the top of the bull market's leadership list. The rally continued into June 2017, dropping into a triangular correction that ejected to higher ground in September. Balanced price action then took control, carving a rising channel that eased into a shallow trajectory in January 2018 after the stock rallied within a few cents of $250.

The monthly stochastics oscillator ended a long-term buy cycle in the fourth quarter of 2017 when it printed a bearish crossover, but downside momentum has developed slowly in the first half of 2018. The indicator has now dropped to the lowest low since May 2017 but still hasn't undercut the bottom of the last sell cycle, which ended in April 2017. Traders should look for a rapid increase in selling pressure if it crosses that threshold, marked by an uncomfortable shake-out of weak hands. (For more, see: How NVIDIA Makes Money.)

NVDA Short-Term Chart (2017 – 2018)

The rising channel that formed in May 2017 (blue lines) broke down in April 2018, giving control to the shallow channel (red line) in place since January 2018. This shift marks a maturation of the long-term uptrend rather than a bearish divergence that might signal a new downtrend. It also suggests that institutional capital has now replaced fast-fingered momentum traders in guiding this stock's price action.

The red channel indicates a downside target below $220, with the bearish stochastics cycle raising the odds that buyers' efforts will fail before reaching that support level. The intersection between blue channel support and the 50-day exponential moving average (EMA) in the $230s looks like the best spot for bulls to make a stand and try to lift the price higher than resistance above $280. More likely, a bounce forming in that price zone will reverse at or near the broken highs at $250.

On-balance volume (OBV) topped out in February 2018 and turned lower after the March reversal. It dipped to the lowest low of 2018 in April, while the uptick into May failed to reach the prior highs, generating a bearish divergence that predicted the reversal and failed breakout. Selling pressure since the downturn hasn't set off additional signals or provided any short-term guidance.

[Learn more about using supplemental indicators to analyze stock charts in Chapter 4 of the Technical Analysis course on the Investopedia Academy]

The Bottom Line

NVIDIA shares reversed at three-month channel resistance despite a strong first quarter earnings report and then failed a breakout above horizontal highs at $250. This bearish price action opens the door to a decline that could reach channel support below $220. (For additional reading, see: Goldman: Tech Regulation to Benefit NVIDIA, Cisco.)

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