Does Bearish Engulfing Pattern Top NVDA? | a cautious investor

Large-cap growth stocks have been outperforming for quite some time, and semiconductors are perhaps best representative of the strength of that trade in recent months. In fact, the Semiconductor ETF (SMH) finished the week up 29% year-to-date, well ahead of the S&P 500 and Nasdaq 100, which are up about 7.5% in 2024.

Nvidia (NVDA) was perhaps the most overheated of the Magnificent 7 stocks, up more than 87% in 2024 through Thursday’s close. However, on Friday, NVDA rose and closed lower, forming a scary bearish pattern. Does this mean Nvidia is top notch?

Let’s start by reviewing the longer-term trends that will play out this week. This was exceptional. After breaking through resistance around $500 in early January, Nvidia embarked on a sustained upward trend of highs and lows. NVDA has nearly doubled in value so far this week, reaching an intraday high of $974 on Friday. But here, the lower closing price really tells the story.

Bearish pattern is a classic two-bar reversal pattern where the real body of the second day “swallows” the range of the real body of the first day when followed by an up close, followed by a down close. The two-day intraday chart shows how short-term price action can signal a true sentiment reversal.

Now we are looking at this week’s price action using 5-minute candles. Notice how Thursday’s rally ended by continuing the upward trajectory that started on Tuesday. There was a wide gap at the open on Friday, but after the initial rally, NVDA began to decline and continued to do so into the afternoon. By the close, Nvidia was well below Thursday’s trading range, creating a bearish pattern.

The good news about the 2-bar candle pattern is that it offers a built-in risk management system! Steve Nison is generally credited with introducing candlestick charts, a traditional Japanese form of technical analysis, and promoting its benefits to Western technical analysts. I spoke with Steve about reversal patterns a few years ago and he mentioned that the high of a two-bar bearish engulfing pattern could be used as a simple stop-loss technique.

Therefore, if NVDA breaks above the $975 level next week based on Friday’s intraday high, it would invalidate the reversal pattern and suggest further upside is possible. Otherwise, the bearish implications of this pattern remain intact and continue into March, suggesting that semiconductors may be on the move to the downside.

Author’s Note: I have set up a price alert for when NVDA crosses $975. Technical Alerts WorkbenchWe hope you do the same!

Assuming there is a “high”, at least for now, how can we identify potential downside targets for Nvidia?

The trend line, based on major 2024 lows, suggests a downside target around $760-$775, depending on how quickly the decline occurs. This is also fairly consistent with Nvidia’s most recent low of around $775. If it fails to hold at this level, I will enter the 200-day moving average, which currently stands at around $660.

A quick Fibonacci analysis suggests an initial downside target of around $750, which would represent a 38.2% retracement from the October 2023 low to the recent high around $975. The 200-day moving average is also well aligned with the 50% retracement level near $682, ​​further highlighting this as a potential bearish support level.

As I mentioned at the beginning of this article, I believe charts like Nvidia are innocent until proven guilty. This means that the uptrend will remain as long as we continue to observe the pattern of higher highs and higher lows. However, by discovering a bearish pattern in NVDA and S&P 500, and Nasdaq 100We can anticipate how a short-term price reversal could actually manifest itself in a broader decline that could surprise investors!

RR#6,

dave

P.s Are you ready to upgrade your investment process? Check out our free behavioral investing course!

David Keller, CMT

Chief Market Strategist

StockCharts.com

disclaimer: This blog is for educational purposes only and should not be construed as financial advice. You should not use any of our ideas and strategies without first evaluating your personal and financial situation or consulting a financial professional.

The author had no positions in any securities mentioned at the time of publication. All opinions expressed herein are solely those of the author and do not in any way represent the views or opinions of any other person or entity.