NVIDIA Stock: Outside Reversal
NVIDIA Corporation (NASDAQ:NVDA) stock has had an incredible year, so good that this semi-conductor maker is a top-performing stock in the NASDAQ 100.
NVDA stock was up 259% in 2016, until a sell-off on December 28 took the price down 6.88%. There were a number of catalysts that triggered and fueled this sell-off.
The first catalyst is straightforward, and it has to do with taxes. Shares sold on December 28 would settle in 2017 and, as a result, investors wishing to lock in capital gains on NVIDIA stock would not have to worry about paying taxes until 2018. With NVDA stock up as much as it is this year, this is not a terrible strategy to follow.
The second catalyst is that NVIDIA stock had reached a level of resistance that is outlined by looking at the NVDA stock chart. Swing traders would have used the pattern that appears on the stock chart as an opportunity to sell, in hopes of buying back NVIDIA shares at lower prices.
These catalysts could develop into something more sinister but, as long as NVDA stock is trading above support, I cannot field a bearish argument.
The following NVIDIA stock chart illustrates the resistance level that swing traders would have used to identify a trading opportunity.
Chart courtesy of StockCharts.com
The sell-off in NVIDIA stock was triggered by the price as it wandered beyond the resistance that was outlined by the ascending channel. This ascending channel has two trend lines that define the upper and lower bounds. NVIDIA stock has been trading within this channel since the lows that were generated in February 2016. This channel has firmly defined the bullish trend in NVIDIA stock, and the price has effectively oscillated between these two trend lines.
Any time the price has wandered outside this channel, traders have stepped in to push shares back within this channel. In early November, I believed that Nvidia stock was due for a correction because it wandered below support, but my beliefs were ill-advised, as the price proved me wrong. NVDA stock quickly reversed back into the channel, and shares proceeded to trade with a much higher price tag.
This week marked the second time that the price wandered beyond the ascending channel and traders once again acted swiftly to push the price of NVIDIA stock back within the channel. One could argue that the price support is due to be tested once again.
This ascending channel is created on a log-based price chart and, as a result, the distance in dollars between support and resistance continues to increase as the trend progresses.
The level of price support that is indicated by the channel also coincides with the 50-day moving average.
The following NVIDIA stock chart illustrates this moving average.
Chart courtesy of StockCharts.com
The 50-day moving average and support outlined by the ascending channel currently coincide at one price.
The 50-day moving average has acted as a level of support for much of NVDA stock’s bullish run in 2016. The 50-day moving average is created by taking the average of the stock closing prices over the past 50 days. This indicator is used to distinguish between the stocks that are technically healthy from the ones that are not. Trading above the moving average is bullish, and trading below it is bearish.
The violence associated with yesterday’s sell-off, given that NVIDIA stock opened at a new high and closed on the lows that also took out the lows the day before, is what traders refer to as an outside day. This type of price action acts as a bearish signal, indicating that a reversal has developed. The fact that this reversal occurred as the channel was penetrated adds to the bearish theme that a top may have developed, and supports a possible test of support.
The 50-day moving average will now act as my bearish confirmation indicator. If NVDA stock ever manages to trade below this moving average, I will have all the reason I need to become bearish on NVIDIA stock.
Bottom Line on NVIDIA Stock
There were a number of catalysts that triggered the sell-off in NVDA stock and, in the process, a top may been formed. I can only assume that Nvidia stock will test support that coincides with the ascending channel and the 50-day moving average.