wildpixel/iStock via Getty Images Investment thesis NVIDIA Corporation (NASDAQ:NVDA) is a prominent stock on my watchlist, as I constantly monitor the company both based on fundamental data and with technical analysis. On December 7, 2022, I suggested it was time to downgrade the stock to a hold rating until a more expressive setup would form. As the stock followed my suggested trajectory, it’s now time for an update. I want to discuss the most likely scenarios I see forming in the coming weeks. In this article, I explain an actionable trading opportunity in the short term; I discuss a contingency plan with multiple outcomes, while I always examine the downside risk by considering appropriate stop-loss levels and actively managing the risk exposure. A quick look at the big picture The U.S. technology sector could not continue its relatively strong performance observed during November 2022, and has since been the worst performer among the other sectors. The semiconductor equipment and materials industry continues to lead the sector; semiconductor manufacturers are performing flat on a monthly perspective, despite the industry experiencing positive momentum in the past week, which I more closely discuss in the next paragraphs. finviz finviz On its weekly chart, the VanEck Semiconductor ETF (SMH) has again tested its long-term support at its EMA200, and has since strongly rebounded in the past few weeks, projecting the industry reference toward its EMA55, “the magic line.” This hasn’t been consistently overcome since SMH dropped in its downtrend during the first few months of 2022. Although the recent positive momentum is hinting at more likely upside potential, the industry reference is still struggling to build up significant relative strength when compared to the broader technology market, the Nasdaq Composite (IXIC), or more narrowly the Nasdaq-100 Index (NDX) tracked by the Invesco QQQ ETF (QQQ). Author, using TradingView Where are we now? In my last Nvidia article, “Nvidia: After 50% Performance, It’s Time For An Update,” published on December 7, 2022, I changed my positive opinion on the stock after it reached a price where my risk/reward analysis was hinting at more downside risk. I saw the stock forming a downward wave, which I defined as likely be corrective wave B. I consider as more likely a temporary consolidation as the stock seems to get rejected at its resistance on dropping buy-side volume, slowing momentum and seemingly on peaking relative strength. As seen in the following chart, despite the stock achieving a climb slightly higher than what I expected, NVDA traced my assumed trajectory downwards and rebounded at what I suggested would be its strong support level. If the actual formation leads to a temporary pullback, price levels around $140 are seen as of utmost importance for eventually leading to a strong rebound. Investors who were already following my calls on NVDA and secured their gains could have avoided a significant drop and are now in the privileged position of being on the sidelines while the stock is forming its next wave. NVDA stock has reached its important price level at $160, a price target I defined also in my former fundamental analysis while its volume is remarkably dropping, a situation I always closely observe, as it usually leads to significant changes in a stock’s price. Author, using TradingView NVDA has given signs of resilience on important support, and despite strength on a weekly basis, the stock is still lacking in relative strength on its daily chart. This seems to be less of a concern, as the recent positive momentum suggests a better setup in the short- and medium-term. What is coming next? To discuss my analysis of the probable outcome in the coming weeks, I consider NVDA’s daily chart, where both the relative strength compared to the broader technology market, the Nasdaq Composite (IXIC), and the MACD are signaling the likelihood of more upside potential. The stock is facing its EMA144, a moving average I consider useful for confirming breakouts from a medium trend and which has been helpful in analyzing the recent movement of NVDA. Author, using TradingView It’s still early to determine with more certainty if the actual uptrend is part of a new Elliott impulse sequence, or if NVDA stock will form a corrective sequence. If I consider my former assumption of a corrective sequence, I would see likely outcomes for the actual wave at $178, $188, or, in the most optimistic scenario, even $268 for the actual wave. But I am now more inclined to consider the wave formation as a new impulse sequence, as wave 2 is 61.5% of wave 1, almost a perfect 0.618 Fibonacci ratio. This would lead to assuming that the actual uptrend would form wave 3 of the sequence. Here, the most likely targets are seen at $188, $218, or $268. Both assumptions are hinting at significant upside potential, while investors can limit their downside risk to the EMA55 or at the lowest at $140, or slightly below it. Investors may want to particularly observe how NVDA stock closes the week, as the stock may gain further in momentum. It could seemingly close over its EMA200 on increasing strength. If the stock overcomes this resistance by the end of the week, it would mark a strong sign of a continuation, and investors could sequentially adjust their stop-loss by tracing the stock’s advancement. After the strong recent movement, and considering the likelihood of significantly higher prices with limited downside risk, I adjust my rating on NVDA, upgrading the stock to a buy position. Despite this, as a long-term-oriented investor, I would not consider any major position until NVDA stock has confirmed a significant breakout over its long-term moving average. The bottom line Technical analysis is not an absolute instrument, but a way to increase investors’ success probabilities and a tool allowing them to be oriented in whatever security is listed on the markets. One would not drive towards an unknown destination without consulting a map or using a GPS. I believe the same should be true when making investment decisions. I consider techniques based on the Elliott Wave Theory, as well as likely outcomes based on Fibonacci’s principles, by confirming the likelihood of an outcome contingent on time-based probabilities. The purpose of my technical analysis is to confirm or reject an entry point in the stock, by observing its sector and industry, and most of all its price action. I then analyze the situation of that stock and calculate likely outcomes based on the mentioned theories. The semiconductor industry has performed flat over the past month, while the industry reference is hinting at likely more positive momentum despite still struggling to build up significant relative strength. NVDA is forming a new wave sequence, and I now consider a new impulse sequence being more likely than a formerly assumed corrective sequence, which translates to more upside potential for investors. While the upside potential is seemingly very promising, the downside risk is limited, and investors can consider setting their stop-losses at the discussed prices to avoid more significant losses. The recent developments have led me to reevaluate my contingency plan and NVDA’s rating, which I now consider to be a buy position. As no one can predict with certainty the upcoming price action, my analysis offers multiple scenarios with targets considering multiple outcomes, which could progressively be observed and adapted.
