There’s no denying it. NVIDIA Corporation (NASDAQ:NVDA) have been a beast for the past couple of years, trouncing the performance of rival Advanced Micro Devices, Inc. (NASDAQ:AMD), as well as AMD’s frenemy Intel Corporation (NASDAQ:INTC). All told, NVDA stock is up 469% since the beginning of 2016 and has gained a whopping 75% this year so far.
The reason for the advance is even more surprising. While a stabilizing PC market has supported modest demand for next-generation graphics cards, it’s actually been the rise of cryptocurrency mining and artificial intelligence that’s whipped up a much bigger demand for NVIDIA’s GPUs. As it turns out, graphics cards are better-suited mini-computers for the sort of number-crunching required by both budding arenas.
As the old saying goes, though, “nothing last forever.” Sooner or later traders are going to look back and decide the NVDA stock price has moved a little too far, and profit-taking will ensue.
Indeed, we may be dangerously close to the tipping point right now.
NVIDIA Is Playing With Fire
All stocks ebb and flow, that’s just trading. Sometimes, though, the ebbs and flows can be sizable. The trick is figuring out when and where a stock’s movement is just a little volatility and when and where things are more serious.
Fortunately, the NVIDIA chart has been kind enough to leave us a couple of hints about what may be in the cards.
First, though not foremost, NVDA stock is dancing with its 100-day moving average line (purple) in a way that suggests sellers may be looking for a way to break under it. The stock broke under that key line at $183.64 on Monday and though it ended up closing back above it, the recovery effort wasn’t exactly convincing. There was also little bullish follow-through on Tuesday.
In light of Friday’s strong close following a similarly steep selloff on Tuesday of last week, it’s clear that traders have changed their tune regarding the stock’s future. One more good blow that drags the stock under the last remaining support area, and that’s it — there’s no support left anywhere nearby.
And, of course, with the broad market struggling to hold off a significant, marketwide selling effort, the deck looks stacked against NVDA shares.
As for how far the stock might slide if the 100-day moving average line fails as a floor… well, this is where things get interesting.
A couple of assumptions — both very reasonable — have to be made to give the possibility its due consideration. One of them is, with a trailing price-earnings ratio of 47.2 and a forward-looking P/E ratio of 40.0, NVDA stock is considerably overvalued and ripe for a rather big pullback after an impressive, but mostly hype-driven, advance since early 2016. The second assumption is that traders have already mentally drawn lines in the sand based on the chart’s history.
With that as the backdrop, it’s actually quite fascinating to see how a couple of different technical analysis techniques are in agreement that there’s something about the $141.45 level and, should that level not hold up as a floor, the $94.45 mark stands out. Those two numbers are key Fibonacci retracement lines and also where NVDA stock has found technical support in the past; it’s much easier to make support out of a previous floor than it is to start from scratch.
It would be easy to chalk up the idea that the Fibonacci retracement lines align with previous proven floors to mere coincidence. In trading, though, there are few coincidences. Even when traders don’t realize it, they’re behaving in relatively predictable ways.
Bottom Line on NVDA Stock
The prospect of a 25% tumble seems unlikely, while the notion of a 50% pullback to the $94.45 level seems downright ridiculous. Never say never, though. Even at a price of $94.45, the forward-looking P/E ratio on NVDA stock would still be a relatively normal 20.1.
And, should the cryptocurrency bubble burst (which seems increasingly likely with Bitcoin prices now around $12,000), the key driver for NVIDIA’s rally could wither away in a hurry. Few people want to concede that could happen, but few people wanted to concede the dot-com mania could come to as screeching halt and few people wanted to believe the housing lending market could implode either.
A cryptocurrency meltdown wouldn’t necessarily pull the rug out from underneath NVIDIA’s business. It would, however, pull the rug out from underneath the perception of the company’s prospects, as well as undermine the “gotta have it” mentality that’s been responsible for the bulk of the gains over the course of the past couple of years.
At the very least, traders (and even long-term investors) should be thinking about the downside risks here, and keeping the aforementioned downside targets in their minds. One more bad day could kick-start a surprisingly rough patch.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can follow him on Twitter, at @jbrumley.