Is It Time to Buy NVIDIA?

NVIDIA Corporation (NVDA) stock posted historic gains in 2016 and 2017, rising to market leadership on the heels of a cryptocurrency boom that drove sales of high-performance graphics cards. The furious uptrend for NVIDIA continued for months after bitcoin and its cousins crashed off unsustainable highs, generating new highs into October's all-time high at $292.76. The stock has been crushed since that time, spiraling lower in a brutal decline that has now exceeded 50%.

Fortunately, the calendar holds a little good news for battered shareholders, with this week making the final phase of year-end tax-selling season. Everyone who has bought and held the stock in a non-retirement account since May 2017 has incurred a capital loss that can be deducted, up to $3,000, from next year's tax bill, or credited against a capital gain. Better yet, the negative balance can be rolled into future tax returns until the full loss is taken.

In addition, next week marks the start of the January effect, which favors buying pressure in the prior year's beaten-down performers. The market could be sensing that transition in this week's positive tape, setting the stage for a semiconductor relief rally. NVIDIA could fill November's gap between $170 and $200 in response to that tailwind as well as technical readings that will flash buying signals when the stock closes above $138.

The stock bounced into the mid-$20s in 2011 after hitting a four-year low in the single digits in 2008, and it reversed in a downtrend that ended in the low teens one year later. It posted modest upside for three years, doubling in price while many tech stocks took off for the stars. Price rate of change escalated in July 2015 as the crypto boom took effect, generating a vertical advance that reached the triple digits 18 months later.

A five-month correction ended in April 2017, yielding a quick burst to $170, followed by channeled price action that continued into the October 2018 top. The subsequent decline unfolded quickly and with little warning, trapping many shareholders who expected an orderly pullback. Investor sentiment improved after the stock bounced at $176 at the end of the month, generating many bottoming calls.

Hopes were crushed by the 30-point gap on Nov. 16 in reaction to a major reduction in fourth quarter guidance, triggering a capitulatory decline that reached a 19-month low earlier this week. The stock has bounced in the past few sessions but is still trading below the November low at $133 after failing to hold that support level last week. This keeps bears in full control as we flip the calendar into January.

Relative strength readings, along with Fibonacci clues, suggest that it's almost time to buy NVIDIA shares. The monthly stochastics oscillator has crossed into an oversold reading for the first time since 2012, while the weekly indicator has been glued to that extreme level since October. This potent combination doesn't guarantee an intermediate bottom but informs market players that it's time to pull up the charts, watching price action for bottoming signs. 

Meanwhile, the uptrend since 2015 unfolded through an Elliott five-wave pattern, with a channeled fifth wave (third impulse wave). Fibonacci grids stretched across this price structure organize price action while highlighting hidden support and resistance levels getting tested during the decline. This view shows the downtrend reaching the .618 retracement of the longer grid after breaking support at the .786 retracement of the shorter grid.

Both levels mark potential targets for reversals. However, bears will remain in charge until the stock lifts back above the .786 level at $138, setting off a failure-of-a-failure buying signal that could support a powerful recovery wave. That's just seven points above the most recent closing price, so market players interested in owning the stock need to pay close attention to price action out of the gate in 2019.

NVIDIA stock could end its furious decline in the coming weeks and enter a high-percentage recovery rally.

Disclosure: The author held no positions in the aforementioned securities at the time of publication.