NVIDIA Stock Is Constructively Alleviating Overbought Conditions

NVDA StockNVDA Stock: Constructive Developments

NVIDIA Corporation (NASDAQ:NVDA) stock went on an epic run last year, where the share price appreciated by 226.92%. This epic run was supported by a number of technical indicators. However, these indicators are now suggesting that the path of least resistance is geared towards lower prices. This can mean a number of things, but the price action is suggesting that NVDA stock is doing an extremely good job at unwinding extremities that were caused in the previous advance. If this continues, it could be setting up the conditions to initiate the next advance in NVIDIA stock.

To clarify for those who are unfamiliar with my style of investment analysis, I focus my attention on deciphering price patterns and technical indicators that are generated on a company’s price chart. This method of analysis is known as technical analysis, and it is based on the notion that historical price and volume data can be used to discern trends and forecast future prices. This may sound like a preposterous idea, but I have had great success using this method to generate views on potential investments, and my many followers can attest to the value this method provides.

The following NVIDIA stock chart illustrates the indicators that supported that accelerated advance last year, but have since suggested that lower prices are likely.

NVDIA stock chart

Chart courtesy of StockCharts.com

There were two distinct indicators, on the chart above, that served to support and reinforce the accelerated advance that took place last year. These indicators are the relative strength indicator (RSI) and the moving average convergence/divergence (MACD) indicator.

The RSI, located in the top panel of the chart above, is an oscillator that is used to indicate when an investment is overbought or oversold. An investment is overbought when the oscillator crosses above 70, and it is oversold when an investment crosses below 30. This oscillator can be used in many ways to generate a trading signal.

In this case, a bullish indication was given when the oscillator punched through the 70 level in May 2016 and remained embedded there. An embedded RSI indicator serves to suggest that price is in an accelerated state. While this oscillator remained embedded above 70, NVIDIA shares ran from a price of $40.00 to $110.00 before the indicator finally crossed back below 70 in February 2017. Crossing back below 70 serves to suggest that the accelerated bullish advance has concluded, and a correction is set to ensue.

The MACD indicator, located in the lower panel of the chart above, is a trend-following momentum indicator that uses signal-line crossings to distinguish between bullish and bearish momentum.

A bullish MACD cross was generated in March 2016, indicating that bullish momentum was propelling NVDA stock, and therefore, the path of least resistance was geared towards higher stock prices. From bullish cross to bearish cross, this indicator captured the move from $34.00 to $120.00. In February 2017, the bullish cross finally gave way to a bearish cross. The bearish cross serves to indicate that bearish momentum is now propelling NVIDIA stock, and the path of least resistance is now geared towards lower prices.

Both indicators that supported the advance are now suggesting that a correction has commenced. This correction is necessary to unwind the overbought conditions that were created. This correction has remained constructive, and it may be suggesting that another advance could be in the making.

The following NVIDIA stock chart illustrates the constructive price action that is in development, and a key level of price support.

NVDIA stock chart

Chart courtesy of StockCharts.com

After peaking early this year, NVDA stock has effectively set up a defined trading range. This range is created by using two horizontal trend lines that represent upper resistance and lower support. It is too early to tell if this pattern will contain price during this correction, but it has done the job for the time being.

A possible scenario involves NVIDIA shares oscillating in this trading range until the indicators that support the advance can once again assume a bullish posture. Such a scenario is not out of the question because ultimately, NVDA shares are still trading above the 200-day moving average.

The 200-day moving average is the dividing line between stocks trading in a bull market and stocks trading in a bear market. When the share price is above the moving average, it is bullish, and when the share price is below the moving average, it is bearish. Nvidia is trading above this moving average so I can only assume that the current correction in price is still within the confines of a bull market.

Bottom Line on NVIDIA Stock

I am patiently waiting for the indicators that supported the bullish advance in NVIDIA stock to turn bullish once again. The correction that is currently playing out is constructive, and as long as NVDA stock is trading above the 200-day moving average, my bias is titled towards the bullish camp.