Technical Analysis and Market Entry: Nvidia (NVDA) – Things Could Get a Whole Lot Worse

  • Nvidia (NVDA) price is stuck within a strong descent, and there is little seen in terms of major comfort until the 2018 low area.
  • The stock broke out of a bearish flag pattern formation, which invited a new wave of selling.
  • After the closing bell on Thursday, the company is due to report its quarterly earnings.

Nvidia shares are currently within full control of the market bears, as has been observed over the past five weeks. The stock had initially been enjoying a decent recovery for 2019, having gained a significant 50% after bottoming out in late 2018.

The NVDA stock ran out of bullish momentum, running into resistance up within the $190 territory. It did manage to produce a high for 2019 up at $193 (the price had previously encountered resistance here in September 2017). However, once it had broken above, this acted as a decent demand zone.

As noted in the previous Nvidia article, the stock’s price was moving within the confinements of an ascending channel formation. In terms of the technical view, the noted structure was also considered a bearish flag pattern, which was subject to a breakout south. The bears in the latest week did manage to force a breach, inviting a further wave of selling pressure.

NVIDIA weekly chart.

Bearish Flag Breakout

The lower acting support of the noted flag did give way amid the overall market selloff. The drop was attributed to ongoing U.S.-China trade war concerns. Support was tracking at $170, which saw a gap lower in the latest week’s opening. There isn’t much in the way of a decent safety net for the falling price; eyes would be once again on the 2018/early 2019 bottom area.

If the bearish flag pattern plays out to the textbook, then the stock could be in some serious trouble. Going by the pole of the flag, the length of this is around 55%, which as a result may see another 55% drop for NVDA. Measuring the breakout area of the pattern, the price could slip down to around $75.

Earnings

NVIDIA is due to report quarterly earnings after the closing bell on Thursday. Market expectations are for first-quarter adjusted earnings to reach $0.81 per share, down 61% from a year earlier. Revenue is seen at $2.195 billion, a 31% year-over-year decline.

Last quarter’s results were highly disappointing; revenue fell 24%, earnings per share plummeted 48%, and EPS adjusted for one-time items tanked 53% year-over-year. The primary factor was the gaming platform’s big revenue decline, though the data centre’s weak growth was an additional contributing factor.

There is another potential headwind that could harm the company’s outlook – the United States’ escalating trade war with China. Effective May 10, the Trump administration increased tariffs on $200 billion in Chinese goods from 10% to 25%, which led to China retaliating. This is worrisome as China is Nvidia’s second-largest market behind the U.S.

Trade Recommendation

Shorts are attractive at present for the stock, given the technical price structure, in addition to the worrisome outlook. Further downside is still eyed while the price is outside of the bearish flag pattern. Eyes would be on a retest of the 2018/early 2019 low area, $122, with stops being placed just above the lower flag trend line, $177.

Shorts would be off the cards if the price can break back within the noted formation. Nvidia would need to produce robust earnings to see a bias change in the stock’s price.

Featured image courtesy of Shutterstock.

Author:
Ken has over 8 years exposure to the financial markets. During a large part of his career, he worked as an analyst, covering a variety of asset classes; forex, fixed income, commodities, equities and cryptocurrencies. Ken has gone on to become a regular contributor across several large news and analysis outlets.