A drop in the stock's RSI momentum indicator into oversold territory would actually be a bad thing for investors
Nvidia’s stock will remain in an uptrend, unless the 200-DMA gives way and a key momentum indicator crosses below a certain bearish threshold.
Longer-term investors in Nvidia Corp. have reason to take notice of the stock's recent volatility, but they still have no reason to really worry, much less take action, because the stock remains well within the friendly confines of an uptrend.
That doesn't mean investors shouldn't keep a close watch, as the stock's chart suggests there are a couple of price levels, and a key technical condition, that aren't so far away that could turn the tide to bearish.
One of the most well known and undisputable Wall Street trading maxims is, "the trend is your friend." The idea being, it's easier to make money by riding a trend than trying to beat it.
And one of the tenets of the Dow Theory of market analysis, which has been relevant on Wall Street for more than a century, is that a trend remains in effect until there are definite signs that it has reversed.
After Nvidia's stock more than tripled in 2023, fueled by the artificial-intelligence boom, it more than doubled in the first half of 2024. It has suffered a bout of volatility over the last few months, and is now trading around the same levels as it was in late-May.
The stock bounced 0.9% on Thursday, after suffering through a historic 11% tumble over the previous two sessions.
The trajectory of the current has certainly changed, but the upward direction remains intact. There are a couple key downside levels to keep a close eye on, however, because falling below those levels would be the first real warning signs that the uptrend may have ended, and a new downtrend may be starting.
First is the Aug. 7, 11-week closing low of $98.91, which is about 9% below current levels.
If the stock closes below that price, before it closes above the Aug. 19, five-week closing high of $130, it would confirm a pattern of lower lows and lower highs since the stock peaked at a record close of $135.58 on June 18.
PHOTO: FACTSET, MARKETWATCH
The Dow Theory likens a pattern of lower peaks and troughs to the ebb and flow of a receding tide, and suggests that is a defining characteristic of a downtrend.
Next is the 200-day moving average, which extended to $88.84 in recent trading, according to FactSet. That's about 18% below current levels.
Many view the 200-DMA as a dividing line between longer-term uptrends and downtrends.
Nvidia's stock hasn't closed below its 200-DMA since Jan. 12, 2023. That was just before the current uptrend started to run.
PHOTO: FACTSET, MARKETWATCH
But perhaps more important than the stock's price level is a technical condition defined by the Relative Strength Index.
The RSI measures the magnitude of recent gains relative to recent losses, and is widely used to track a stock's momentum. The RSI can oscillate between zero and 100, but the levels to watch are 30 and 70 - falling below 30 suggests an "oversold" condition and rising above 70 suggests a stock is "overbought."
The RSI for Nvidia's stock was at 41.81 in recent trading, according to FactSet. While becoming oversold might appear to be good news for bulls, as it would suggest a snapback bounce may be coming, it's more important to put the RSI's moves in context.
Many chart watchers believe becoming "oversold" is more of an ability than a condition, meaning the ability to become oversold is actually a sign of underlying weakness.
When the stock's last downtrend was beginning, with its first close below the 200-DMA in 10 months on Jan. 27, 2022, the RSI had dropped below 30 for the first time since June 2019, which was just before the previous uptrend had started.
While an oversold RSI did provide initial support, each subsequent bounce was short lived.
And after the stock first closed back above the 200-DMA in December 2022, the RSI stayed above 30 despite a number of sharp pullback during the current uptrend.
When the stock tumbled 16.9% to start last September, the RSI bottomed at 31.39, according to FactSet data. When it sank 19.8% from late-March 2024 to mid-April, the RSI troughed at 34.02.
And as the stock plunged as much as 26.7% into early-August, which some on Wall Street would say launched a bear market, the lowest the RSI fell to was 33.35.
PHOTO: FACTSET, MARKETWATCH
In contrast, the RSI rose above the overbought threshold of 70 multiple times during the current uptrend.
If the RSI falls below 30, even if the stock is trading above the 200-DMA, the market's stance on the stock could very well pivot, to selling on rallies from buying on dips, a keen characteristic of a downtrend.