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Overbought Nvidia Stock Is Primed for a Pullback Before Rally Resumes

InvestorPlace logo InvestorPlace 7/14/2020 Tyler Craig
a close up of electronics: a Nvidia semiconductor chip © Source: Hairem / Shutterstock.com a Nvidia semiconductor chip

The Nasdaq is blasting to the moon, and Nvidia (NASDAQ:NVDA) shares are being pulled higher alongside. The red-hot chipmaker is working on the tenth candle of its upswing this morning, gaining 2.25%.

a close up of a phone: a Nvidia semiconductor chip © Provided by InvestorPlace a Nvidia semiconductor chip

At the same time, the rally has notched a new record price of $431.69 for NVDA stock.

Let’s investigate if it’s worth chasing new trades here or if patience is warranted.

Tech Stocks are Defying Gravity

We’ll make a case for Nvidia using some good old fashion top-down analysis.

The practice is rooted in the idea that the broad market influences sector performance and sector performance impacts individual stocks. Nvidia doesn’t exist in a vacuum. It’s sympathetic to the broader semiconductor industry, which, in turn, is sensitive to the Nasdaq.

a close up of a map: Nasdaq ETF (QQQ) stock chart showing a powerful uptrend © Provided by InvestorPlace Nasdaq ETF (QQQ) stock chart showing a powerful uptrend Source: The thinkorswim® platform from TD Ameritrade

The relative strength and relentlessness of the Nasdaq’s recent gains have been utterly astonishing. Trying to reconcile the steady drumbeat of record highs with an economy that is still grappling with the novel coronavirus requires some intellectual knot twisting.

Sure, large-cap tech companies are far less sensitive to the pandemic’s fallout versus the likes of cruise lines, airlines and casinos. But their booming stock prices are behaving as if the virus is providing a tailwind!


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Here’s my suggestion. Don’t worry about trying to make sense of the rally. Suspend your disbelief and let the charts be your guide.

Tech stocks are smoking hot on both absolute and relative bases. And that bodes well for Nvidia, no ifs ands or buts.

Semiconductors

The story for semiconductors as a whole is very similar. While they haven’t rocketed as powerfully as the Nasdaq, the Semiconductor ETF (NYSEARCA:SMH) has carved out a consistent uptrend since March. The 20-, 50- and 200-day moving averages are all rising and lined up atop each other in bullish fashion.

Furthermore, last week saw an ascending triangle pattern breakout that brought fresh buyers. The fund popped another 2% this morning to an all-time high.

a close up of a map: Semiconductor ETF (SMH) chart showing recent breakout pattern © Provided by InvestorPlace Semiconductor ETF (SMH) chart showing recent breakout pattern Source: The thinkorswim® platform from TD Ameritrade

SMH provides a “sum of the parts” look at the semiconductor industry. When I look at the individual parts, I get even more optimistic about the current uptrend. There are a ton of solid trending stocks in the space. Plus just this morning, news broke that Analog Devices (NASDAQ:ADI) was buying Maxim Integrated (NASDAQ:MXIM) in an all-stock deal worth $21 billion. This is the type of news that should keep the sector aloft.

NVDA Stock Charts

With this week’s pop, Nvidia is now up 81% on the year. Its weekly chart has had a brief pause or two along the way, but really it’s been a straight shot higher off the March low. Volume patterns have been bullish along the way, as have the moving averages. Momentum is increasing during the current advance as well.

On the daily time frame, you can see the stock consolidated for the entire month of June, but it still stayed above the rising 20-day moving average. That type of consistent buying into weakness by bulls to support a short-term moving average is impressive. It’s no wonder we’ve seen such powerful follow through over the past two weeks once the $385 resistance zone was taken out.

a close up of a map: Nvidia (NVDA) stock chart showing overbought conditions © Provided by InvestorPlace Nvidia (NVDA) stock chart showing overbought conditions Source: The thinkorswim® platform from TD Ameritrade

But there is a problem. NVDA stock is working on its tenth consecutive candle with a higher low and higher high. Looking at the stock’s history, it’s virtually never been a smart idea to buy when prices were this extended. The overbought conditions demand waiting for a lower-risk entry if you care anything about the risk versus reward.

If Nvidia follows past behavior, it should retreat toward the 20-day moving average. At a minimum, we at least need to see some consolidation to work off the overbought pressures. Until we see either development, I view buying NVDA here as high risk.

Tyler Craig is a member of the Chartered Market Technician’s Association and holds the CMT designation. His entire adult life has been dedicated to helping individuals learn how to trade as an elite instructor and personal mentor. To join his team and the best trading community on the planet, click here. At the time of this writing, Tyler didn’t hold positions in any of the aforementioned securities.

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