Is a bullish trend reversal in NVIDIA shares afoot?

NVIDIA shares staging a comeback

After last Wednesday’s US market close NVIDIA reported record first quarter (Q1) sales amid record data centre and gaming revenues.

Sales for Q1 of 2022 at the US’s largest chip maker rose 46% to $8.29 billion, up 8% on the previous quarter. However, since net income dropped by 46% to $1.6 billion from $3 billion in the previous quarter (because of a $1.35 billion hit from its axed Arm acquisition), NVIDIA anticipated taking a $500 million hit to sales from its withdrawal from Russia, and because of its softer forward guidance, its share price briefly dropped to a one-year low at $152.40 last week.

The company expects revenues to dip to $8bn for the second quarter, which is lower than analysts previously expected. Other tech companies, such as Applied Materials Inc and Cisco Systems, have also lowered their earnings guidance due to the two-month long Covid lockdowns in China, many of which are expected to be lifted this week, however.

The publication of the Federal Open Market Committee’s (FOMC) early May minutes, which showed that the Federal Reserve is considering assessing its monetary policy at its July meeting, made market participants hope that a less aggressive Fed monetary policy than originally thought may be pursued, spurring equity buying amid risk-on sentiment after several weeks of declines.

The NVIDIA share price benefitted from this buying frenzy with its stock rising by nearly 20% in just two days after its near 50% drop from its late March high, with investors focusing on the chip makers’ strong sales growth which was achieved, “against the backdrop of a challenging macro environment,” the company’s founder and CEO, Jensen Huang, said. “The effectiveness of deep learning to automate intelligence is driving companies across industries to adopt NVIDIA for AI computing,” he added. “Data center has become our largest platform, even as gaming achieved a record quarter."

Huang stated that NVIDIA is gearing up for “the largest wave of new products in [its] history with new GPU, CPU, DPU and robotics processors ramping in the second half.” He is of the opinion that his company’s new chips and systems will “greatly advance AI, graphics, Omniverse, self-driving cars and robotics, as well as the many industries these technologies impact.”

Bullish technical reversal

Since last week’s low at $152.40 hasn’t been accompanied by a lower reading in the 9-day Relative Strength Index (RSI), and instead a higher low compared to its early May low has been made on the oscillator, positive divergence can be seen on the Daily Financial Bet (DFB) NVIDIA chart. This configuration could have forewarned investors of a likely bullish trend reversal.

The bottoming formation has now been confirmed by Friday’s daily and weekly chart close above the mid-May high at $183.62 with the $203.85 to $209.93 resistance zone being in view. It contains the January-to-March lows and also the early May high and is expected to cap, at least in the short-term. Previous support, once slipped through, nearly always acts as resistance when revisited from below.

This resistance area is key for the medium-term trend as failure around it would mean that the current advance has simply been a corrective countertrend move with the downtrend, which began in November, expected to continue over the coming months, targeting the 200-week simple moving average (SMA) at $118.31.

If, however, a weekly chart close above the $209.93 mid-March low were to be seen, two relative highs – when a candle makes a higher high than the candle to its left and right – on 4 and 17 May, would have been overcome, meaning that a longer lasting bullish reversal is taking shape.

Such a medium-term bullish reversal formation would be validated if a higher low were to be made above the current May low at $152.40 in the days and weeks to come, followed by another advance towards the 200-day SMA at $242.25.

The fact that last week’s low was made right within the $153.19 to $147.07 support zone, made up of the August, November 2020 and February 2021 highs, and that a weekly Bullish Engulfing pattern can be made out on the weekly candlestick chart, bodes well for the bulls.

Such a pattern is created when the body – the distance between the open and close - of a candle “engulfs” the previous body, in this case on the weekly chart. It shows a reversal in the trend when buyers outgun sellers.

In addition to the above it is possible that an Elliott Wave A, B, C correction lower to the downside has just ended at last week’s low. If this were to indeed be the case, an eventual rise above the November peak at $345.92 should ensue.