$NVDA Technical Breakdown Q2 2023
Disclaimer: This post is intended for informational purposes only and is not to be construed as financial advice. Investing in the stock market involves a significant risk of loss, including the risk of loss of principal. Past performance is not indicative of future results. You should conduct your own research and consult with a qualified financial advisor before making any investment decisions.Disclosure: At the time of this publication, I, the author, personally hold a position in $NVDA. Please conduct your own research before making any investment decisions.Nvidia Corporation ($NVDA), a leading chipmaker and AI company is on a tear recently, with its stock price hitting $389.46 on May 26, 2023 - a nearly 30% jump since the last earnings report. Contrastingly, the broader economic, geopolitical, and social environment send signals of uncertainty. The market's volatility index (VIX), which currently rests at a relatively low level of 17.95 hints at an imminent downturn, indicating complacency among investors. However, it's important to remember that markets are complex and frequently behave contrary to expectations.
While the broader market seems calm, one sector, in particular, is leading the trend: the technology sector with chipmakers and AI companies are seeing a significant uptick.
The big question is, is it too late to buy $NVDA?
Before we get into that, let's be clear, this analysis is not financial advice. It's meant to shed some light that help us make better-informed decisions.
Let's get into it!
Nvidia's fundamentals are robust, but that's not our focus today. With the company venturing into high-growth territory and emotional responses overpowering rational data, we're turning our attention to technical analysis for potential insight into future movements.
To begin, we can see the Relative Strength Index (RSI) for NVDA is at 83.62, suggesting an overbought condition, which is typically considered when the RSI is above 70. This high RSI value might imply that the stock is due for a short-term pullback, as observed in NVDA's historical performance.
In the past, NVDA's RSI crossed the extreme overbought line of 80 five times: on Feb. 19, 2020, Sept. 2, 2020, July 6, 2021, and Nov. 8, 2021. Each time this occurred, there was a short-term pullback in the stock price ranging from 5.0% to 38.9% over periods from three sessions to a month. However, in each case, the stock reached a new record high within three months of the pullback.
Previously, a pattern referred to as bearish technical divergence was observed, which suggests that rallies are taking more and more out of the bulls, leaving them vulnerable to bear attacks. This pattern emerged in Nov. 2021 when the stock kept rising to a record $333.76 on Nov. 29, 2021, while the RSI was actually trending lower to a sub-overbought reading of 69.53 that day. This was followed by a significant 11-month bear market, where the price plunged 66.4% before bottoming at $112.27 on Oct. 14, 2022.
NVDA's price is currently close to the Fibonacci resistance level of $394.8. If it breaks this resistance, the next key level to watch would be $483.48. On the other hand, if the price declines, the Fibonacci levels of $364.09, $360.93, and $339.98 could provide support.
Fibonacci extension is another technical tool to identify possible resistance.The most common Fibonacci extension levels are 1.618, 2.618, and 4.236.
Let's calculate the 1.618 Fibonacci extension level for NVDA:
Subtract the low from the high to get the difference: 394.80 - 108.13 = 286.67
Multiply the difference by the Fibonacci ratio: 286.67 * 1.618 = 464.02
Add the result to the low price: 108.13 + 464.02 = 572.15
However, please note that these levels are theoretical and while they can often serve as areas of support or resistance, they're not guaranteed to hold.
In summary, NVDA has been experiencing a strong upward trend across all these periods. This is accompanied by high trading volumes, suggesting robust investor interest. Given the strength of this upward trend and high trading volumes, it could be surmised that the market sentiment towards NVDA is bullish.
During the past 13 years, the highest PE Ratio of NVIDIA was 224.98. The lowest was 13.68. And the median was 39.94
So, where do we stand?
Nvidia's underlying fundamentals are strong, yet the recent trading frenzy seems to eclipse these fundamental values. As emotions run high, we're observing price action that is increasingly detached from the stock's intrinsic worth. Anticipate considerable volatility in the coming month, which may lead to substantial capital losses for those choose to trade this stock even though overall sentiment is bullish. That being said, our enthusiasm for NVDA and AI at large is unwavering. We're extremely bullish, and we foresee plenty of upside potential. Despite this, due caution is warranted. Here are our projections and perspectives for the ensuing month:
Bear Scenario:
While we've discussed the bull case for NVDA, it's equally important to consider the potential downside risks. If we look at the Fibonacci retracement levels, $364 emerges as the first potential support level that could hold during this breakout rally. Moreover, during a bull run, the 5-day moving average often provides a level of support while 10-day MA could signal possible weakness, so it's essential to keep an eye on this as well.
One notable aspect of NVDA's recent price action is the significant gap up. This has created a large area that could be 'filled' if the stock were to pull back, which is a common pattern in technical analysis. As such, we could see NVDA potentially retracing to the $320 level, which, given the gap-fill scenario, could serve as a very strong support level.
These are all potential scenarios that could play out in the near term. It's important to monitor these levels and adjust our investment strategies accordingly, always being mindful of both potential upside and downside risks.
Bull Scenario:
On the more optimistic, or bullish, side of the spectrum, we draw upon Tesla's impressive P/E ratio of over 1,000 during its significant rally two years ago. If NVDA were to reach a similar P/E ratio, this would translate to a stock price of $2190. However, considering NVDA's near trillion-dollar market capitalization and current growth rates, reaching such a level would be extremely ambitious. At this stock price, NVDA would have a market cap of an astonishing $5 trillion.
For perspective, Apple, currently the world's most valuable company, has a market cap of $2.7 trillion. If NVDA were to reach the same market cap as Apple, this would equate to a stock price of $1095. However, the market often anticipates such significant milestones and investors may start selling before reaching this psychological barrier.
As NVDA begins to show signs of a meme stock momentum, it’s essential to draw upon historical precedents from similar market movements. Notably, Dogecoin experienced a sharp downturn after it nearly reached the much-anticipated $1 target, peaking at $0.74. AMC's stock price exhibited a similar pattern, retreating after it hit $72. There appears to be a consistent trend of investors taking profits when the price hits approximately 3/4 of a clear target. Given this, if we set a bullish target for NVDA at $1,000, we can anticipate a potential price ceiling in the vicinity of $720, where significant resistance may be encountered. For those seeking to mitigate risk, considering an exit at around $680 could be a prudent strategy. This price corresponds to a market capitalization of $1.68 trillion and a P/E ratio of 355.5. While this is an ambitious target, it's not beyond the realms of possibility given the current rally.
Realistic Scenario:
Based on our analysis of Fibonacci Retracement levels and price-to-earnings (P/E) ratio trends, we consider NVDA reaching $480 as the most probable outcome. This represents a potential 23% increase from the current price level. In this scenario, NVDA would have a P/E ratio of 251.31, indicating a market capitalization of approximately $1.18 trillion. This could be an opportune moment to sell, locking in gains before any potential market correction.
While it's also interesting to note that at a P/E ratio of 300, while high, is not unheard of for high-growth tech stocks. This would place NVDA's market cap at around $1.4 trillion and the stock price at approximately $573, which is in line with Fibonacci extension. Given NVDA's strong fundamentals and growth prospects, we believe this could be the upper bounds of realistic outcome.
In conclusion, while trading high volatility stocks with meme stock momentum can be very risky, and has no fundamental backing at this point. It comes down to emotional control and resilience. We believe that a thorough understanding of NVDA's technical and fundamental indicators can guide investment decisions. Please keep in mind that investing involves risk and it is important to do your own research and consult with a financial advisor before making any investment decisions.
