When the boom in Big Tech unravelled last year, Nvidia (NVDA) felt the heat more than most…

It peaked in November 2021 at around $346. And by the time it bottomed out in October, NVDA had lost more than two-thirds of its value.

Compare that to the Nasdaq, which dropped 38% over the same time.

However, from there, the Nasdaq’s and NVDA’s fortunes soon reversed…

While the Nasdaq struggled to hold support in the last quarter of 2022, NVDA went on an almighty tear.

NVDA got an expected surge in demand for its graphic processing units (GPUs) to power AI chatbot software like ChatGPT. Its share price rocketed more than 70% in just a couple of months.

Then, after a quick pullback in December, NVDA surged higher.

But now, NVDA is trading on a price-to-earnings (P/E) ratio of over 130… and it’s up around 126% since October… So today, I want to see if this winner is overcooked.

Heading in Different Directions

The chart below shows NVDA’s clear downtrend last year.

The 50-day Moving Average (MA, blue line) sloped down, and NVDA made a series of lower highs at spots “A” and “B.”

Nvidia (NVDA)

Source: eSignal

Both down legs after “A” and “B” coincided with two key technical signals…

1. The Relative Strength Index (RSI) broke down through support (green line) and stayed in the lower half of its range.

2. The 10-day MA crossed below the 50-day MA, confirming the down move.

However, coming into September, a common reversal pattern started to unfold…

While NVDA was making lower lows (upper orange line), the RSI was trading sideways (lower orange line), forming lots of tiny Vs in oversold territory (lower grey dashed line).

When the price and RSI are heading in different directions (in this case converging), a change of direction is likely.

And that is what we saw.

The RSI bounced and then tracked up through resistance. And NVDA’s huge rally got underway. That rally accelerated with the RSI, gaining traction in the upper half of its range.

However, this time, the divergence between the RSI and NVDA’s stock price (red lines) temporarily brought NVDA’s rally to an end.

After a brief dip below support, the next leg of NVDA’s rally kicked off with the RSI bursting back into its upper range.

You can gauge the strength of that up move by the 10-day MA (red line). It accelerated above the 50-day MA.

Take another look:

Nvidia (NVDA)

Source: eSignal

But the RSI is again making lower highs while NVDA makes higher highs… And NVDA looks vulnerable.

So what am I watching for here?

Repeatable Patterns

The RSI trending lower has led NVDA to retrace lower from its recent high on March 9.

And as you can see in the chart, that action has the RSI back down around support…

When the RSI bounced off this level in late February, NVDA enjoyed a nice little boost. I’ll be looking to see if this pattern repeats.

If the RSI instead breaks below support, however, then this current pullback has further to go.

The other thing I’m watching is our MAs…

Right now, the 10-day MA is still tracking above the 50-day MA.

It’s still early days with the current move… But if the 10-day MA reverses and crosses below the 50-day MA (with both turning lower), then NVDA’s pullback could develop into a far bigger down move.

Regards,

Larry Benedict
Editor, Trading With Larry Benedict

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