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.