NVIDIA Corporation: This is Why NVDA Stock Correction is Imminent

NVDA StockNVDA Stock: Correction Incoming

The semiconductor sector has been one of the best-performing sectors for 2016, up 21% on the year. This return came off a slow start, as the markets experienced selling to start the year.

One of the standouts in this sector is NVIDIA Corporation (NASDAQ:NVDA) stock. This specialized semiconductor company is up 103% year-to-date, as the run higher for NVIDIA stock has been relentless. I would love to say that this relentless run will continue, but I have reason to believe that the current surge in NVDA stock is now slowing, and that a correction is imminent.

My concerns stem from the data I gathered from the NVIDIA stock price chart. As a trader, I have used price charts to develop trading strategies that are both systematic and void of emotion. This process entails great discipline to be effective. The long-term picture in NVDA stock is still bullish, but caution is warranted after such a prolonged run. As a result of my analysis, I am no longer bullish on this name. I would prefer to wait for lower prices that coincide with a bullish setup before I would re-assume a bullish bias.

The following NVIDIA stock chart illustrates the trend line that is responsible for my concern.

nvda

Chart courtesy of StockCharts.com

The uptrend that developed shortly after NVDA stock bottomed in February 2016 is precise and defined. The simple trend line is created by connecting the troughs on the price chart. This uptrend can easily be identified as the price moves from the lower left to the upper right, and I can only wish all my investments had similar trading behavior.

The trend line has served to support the entire bull run in NVDA stock, and the trend line is now in jeopardy of breaking. Trend lines are a simple tool, but they are also one of my most important tools. A break below this line is not to be ignored, as it will ultimately signal an end to this exceptional bullish run higher in NVIDIA stock.

I have reason to believe that this trend line will soon be broken, and the following NVIDIA stock chart illustrates the factors that support this view.

nvda2

Chart courtesy of StockCharts.com

The NVIDIA stock chart above has two distinct signals that have reached extremes and are signalling that the run higher has run out of gas and is presumably running on fumes.

The top panel labeled “RSI” is the relative strength indicator. This indicator is an oscillator that traders use to time their entry and exit points, based on levels that are deemed overbought or oversold. When the RSI oscillator crosses 70, it is deemed overbought, and when it is below 30, it is deemed oversold. A bearish signal is generated when the oscillator crosses back below 70, and a bullish signal is generated when the signal crosses back above 30.

Divergences are used as an early warning that the current overbought or oversold trend is weakening, and that a trend reversal is imminent. The new highs registered in September and early October were not confirmed by RSI, and this increases the likeliness that a sell-off will ensue and break the uptrend line that supported shares this year.

The lower panel labeled “MACD” is a moving average convergence divergence, a simple and effective trend-following momentum indicator. Signal line crossings are used to distinguish between bullish and bearish signals. This signal is converging, and a bearish cross will generate in the coming weeks. This signal is effective in determining which camp is in control, and a bearish cross gives the momentum to the bears.

I can only interpret these signals as bearish. These signals will act as a headwind as the bears gain momentum and a correction ensues in NVDA stock.

The Bottom Line on NVIDIA Stock

The overall trend for NVIDIA stock remains up, but the internal indicators are topping out and are suggesting that the run higher has run out of gas. I would assume a neutral position, which would entail exiting or hedging my position. My view will remain neutral until the NVDA stock chart gives me reason to believe that the corrections have run their course.