Sunday Edition: Dark Skies Ahead? This Bearish Signal Spells Trouble For One Tech Stock

June 18, 2017

Sunday Edition: Dark Skies Ahead? This Bearish Signal Spells Trouble For One Tech Stock

Last week I wrote about a bearish pattern on China’s Google, Baidu (NASDAQ: BIDU). At the end of that article, I made mention that when one market leader starts to turn bearish, others may soon follow.

Sure enough, last Friday, the technology sector experienced a sell-off that extended its losses on Monday and sent some big names—Netflix to name one—into near-correction territory.

It’s not clear what started the sell-off, and it remains to be seen if it was all just a short-term correction or a sign of something more ominous from the group of stocks that has been at the heart of Wall Street’s bull run in equities in the last several months.

One stock in particular that I want to discuss today is Nvidia (NASDAQ: NVDA).

The chip maker was one of the top performers in 2016, delivering returns of 111%, and was up about 56% this year. Then came Friday, June 9, and the sell-off in tech. A week later, NVDA is down almost 11% from the high a week ago.

Many investors have flocked to take advantage of the dive on NVDA, but a technical pattern tells me to wait for better buying opportunities.

But before I get into the technical picture, let’s take a step back and look at Nvidia the company.

Nvidia’s biggest claim to fame are its graphics processing units (GPUs). The company is also making a name for itself selling its own AI-powered autonomous driving technology and supercomputers, though it appears the company won’t stop there. Speaking about the future for AI (artificial intelligence) and Nvidia’s place in that future, CEO Jen-Hsun Huang said in a recent earnings call:

“The next area of growth will occur as enterprise in such fields as healthcare, retail, transportation, and finance embrace deep learning on GPUs.”

Revenues from AI software are expected to jump to $59.8 billion by 2025, and AI is quickly emerging as the powerful technological force that will be a part of our everyday lives in the very near future. Right now, Nvidia’s GPUs are at the center of the AI revolution as the company is the largest GPU maker on the planet.

I’ve written about the company’s biggest rival—AMD—here, and I do think AMD may gain marketshare from Nvidia in the near future and I also think that competition will rise over the coming years from other players. However, I also believe that Nvidia will continue to be a dominate player in the GPU market and could deliver incredible gains from AI in the long-run.

Let’s get into the technical picture.

Source: TradingView.

The two candles I’ve highlighted in the chart above represent the trading days of June 8 and June 9. The pattern that clearly formed on June 9 is a bearish engulfing.

We discussed the bearish engulfing pattern two weeks ago in the Sunday Edition on Momo. It’s a very clear-cut reversal signal and marks the end of an uptrend.

As a reminder, a bearish engulfing pattern can be identified by two candles:

“The first candle in the pattern can vary in size and isn’t pertinent to the pattern itself. The second candle, however, is as it is the reversal signal. This second candle is a long candle that fully engulfs the size of the first candle—thus the “engulfing pattern” name—and creates downward price momentum.

“Ideally, the height of this second candle should extend above the high of the first candle and establish a new low. This downward movement reflects selling overtaking buying strength… and usually comes just before a continued fall in price.”

Just as with Momo, the pattern is crystal clear on NVDA. The second candle in the pattern, the one for June 9, extends both above the high and below the low of the first candle, fully engulfing it. As further support, NVDA’s price hasn’t recovered and is trending down.

If you’re invested in NVDA, now might be a good time to take profit. Just as with Momo and Baidu from the last couple of weeks of these Sunday Editions, if you’re an aggressive trader, you could short NVDA or buy put options with the expectation that the downtrend will continue.

The good news with the three bearish cases we’ve discussed in the last few weeks is that they’ll give investors opportunities to buy great growth stories at much better prices. If NVDA is a company whose future you’re excited about and want to have in your portfolio, keep an eye on the chart and buy in the downtrend before the longer-term uptrend continues.