NVIDIA Corporation (NASDAQ:NVDA) gapped down 3.84% on Wednesday and was falling an additional 3% at one point intraday in sympathy with the S&P 500, which also gapped down and continued to decline heading into the release of the Federal Reserve’s decision on its monetary policy at 2 p.m.
For technical traders the lower prices likely didn’t come as a surprise because on March 29 the stock topped out at the $289.46 level, printed a bearish hanging man candlestick and entered into a downtrend.
A downtrend occurs when a stock consistently makes a series of lower lows and lower highs on the chart.
The lower lows indicate the bears are in control while the intermittent lower highs indicate consolidation periods. Traders can use moving averages to help identify an uptrend with descending lower timeframe moving averages (such as the eight-day or 21-day exponential moving averages) indicating the stock is in a steep shorter-term downtrend and descending longer-term moving averages (such as the 200-day simple moving average) indicating a long-term downtrend.
A stock often signals when the lower low is in by printing a reversal candlestick such as a doji, bullish engulfing or hammer candlestick. Likewise, the lower high could be signaled when a doji, gravestone or dragonfly candlestick is printed. Moreover, the lower lows and lower highs often take place at resistance and support levels.
In a downtrend the "trend is your friend" until it’s not and in a downtrend, there are ways for both bullish and bearish traders to participate in the stock:
- Bearish traders who are already holding a position in a stock can feel confident the downtrend will continue unless the stock makes a higher high. Traders looking to take a position in a stock trading in a downtrend can usually find the safest entry on the lower high.
- Bullish traders can enter the trade on the lower low and exit on the lower high. These traders can also enter when the downtrend breaks and the stock makes a higher high indicating a reversal into an uptrend may be in the cards.
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The Nvidia Chart: On Tuesday, Nvidia printed a bearish engulfing candlestick on the daily chart, which indicated lower prices would come on Wednesday. On the decline, Nvidia fell to the 200-day simple moving average (SMA), tested it as support and regained the level, which indicates long-term sentiment is bullish.
- As long as Nvidia remains above the 200-day SMA, the 50-day SMA won’t cross below the 200-day, which will avoid a death cross taking place.
- If Nvidia closes the trading day below the 200-day and near its low-of-day price, the stock will print a bearish kicker candlestick, which could indicate lower prices will come again on Thursday.
- If the stock closes the trading day anywhere above the 200-day, it will print a bullish hammer candlestick, which could indicate higher prices are in the cards.
- The gap between $253 and $258.20 that was left behind on Wednesday is about 90% likely to fill at some point in the future, which means bears would prefer the stock to bounce up before continuing lower in the downtrend.
- Nvidia has resistance above at $252.59 and $272.29 and support below at $230.43 and at the $230.43 mark.
