Nvidia Corporation (NASDAQ: NVDA) was sliding almost 5% lower on Tuesday in sympathy with the S&P 500, which was trading about 1.7%.
The stock has suffered a heavy downtrend recently, falling about 35% since reaching a high of $289.46 on March 29. 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.
The Nvidia Chart: Nvidia’s most recent lower high was printed on April 14 at the $227.77 mark, and the most recent confirmed lower low was printed at $210.79 on April 18. Since April 14, Nvidia has plunged over 16% without bouncing up to print, at least, another lower high.
- Eventually Nvidia will need to trade higher to continue in the downtrend and the bounce may provide bearish traders a solid entry to take a short position or buy puts. The bounce is likely to take place over the coming days because Nvidia’s relative strength index (RSI) is measuring in at 31%, which indicates the stock is approaching oversold territory.
- Nvidia has two gaps above on the chart, with the first gap between $227.77 and $230.62 and the second gap between the $253 and $258.20 levels. Gaps on charts fill about 90% of the time, which makes it likely the stock will trade up into both ranges in the future, although it could be a long period of time before that happens.
- If Nvidia closes the trading day near its low-of-day price, it will print a bearish Marubozu candlestick, which could indicate lower prices will come again on Wednesday. If the stock bounces up higher intraday to close above the $192.40 level, it will print a hammer candlestick, which could indicate the next lower low has been formed and Nvidia will trade higher on Wednesday.
- Nvidia has resistance above at $195.55 and $208.88 and support below at $187.80 and $180.73.
See Also: Nvidia's 'Crypto Conundrum' Explained: How A Drop In Digital Currencies Could Impact The Stock
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