Bernstein’s semiconductor analyst Stacy Rasgon downgraded NVIDIA’s (NASDAQ:) price target to $180 from $210.
The US government instructed the chipmaker to stop selling chips to China and Russia, as the largest global economies are in a cold war in technological dominance.
The company predicted a potential loss of $400 million so Rasgon reduced his expectations accordingly.
In my last post in May, I discussed the instability of semiconductor supply during an economic downturn. In July, the U.S. Senate passed a bill to subsidize the American chip industry in order to help its companies in the ‘chip war’ with China, as well as help the supply crunch which was causing a severe lag in many items, including cars, video games, weapons, and washing machines.
But what about the technical drivers? Let’s examine the chart.
NVDA climbed 16.2% in the seven sessions after the CHIPS And Science Act allocated $52.7 billion in subsidies for domestic chip production as well as manufacturing tax credits estimated at $24 billion.
However, the stock found repeated resistance at $190, the June high.Then “challenging market conditions” meant Q2 disappointed shareholders on August 24.
Until the U.S. forced NVIDIA to stop selling to China and Russia, its stock was trading within a H&S bottom. Note the 4% falling gap amid the 12% intraday selloff which followed the government ban have blown out the H&S.
Also, note how it perfectly matched the $24.40 downside implied target of a topping pattern between July and August.
And here’s another piece of the technical puzzle that fits perfectly. In my May bear call—when the stock was $166.30 at the time—I submitted that the sizeable H&S from August 2021 to April 2022, implied a $92 target.
The recent, smaller H&S bottom that blew out is expected to have forced traders to reverse positions, which is why failures tend to push the price in the opposite direction of the pattern. If the failed H&S bottom repeats downward instead of upwards, it will reach $90.88. $90.88 is the head or July 5 low of $140.55 minus $49.67, which is the pattern height. That matches the $92 target by the large H&S top. These two target confirmations demonstrate the supply-demand-pressure-point tapestry.
Note: I am not saying that the price will fall straight. It can rise and reach its implied target, along with the ebb and flow of the market. Note that the price neared the bottom of its falling channel, which can shoot the price back toward its top before it continues lower. It is advised to incorporate this possibility into your trading approach.
Trading Strategies
Conservative traders should wait for the price to either return to the channel top or break through its bottom to short.
Moderate traders would wait for the price to retest and fill in the gap, as it tends to do.
Aggressive traders can enter a contrarian trade, expecting a corrective dip after last Thursday’s imperfect bullish hammer (upper shadow may have diluted the candle’s bullish charge).
Trade Sample – Aggressive Long
- Entry: $134
- Stop-Loss: $132
- Risk: $2
- Target: $144
- Reward: $10
- Risk-Reward Ratio: 1:5
Disclaimer: The author currently does not own any of the securities mentioned in this article.
