Chart Advisor: Nvidia Can’t Do It Alone

By J.C. Parets & All Star Charts

1/ Nvidia Can’t Do It Alone

2/ Bearish Engulfing in Software

3/ Keep Your Eyes on Energy

4/ Ding Dong. It’s the Dollar!

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1/ Nvidia Can’t Do It Alone

Yesterday after the bell, chipmaking powerhouse Nvidia (NVDA) released another historic earnings report, fueled by astronomical growth from its artificial intelligence (AI) business. While the stock was up as much as 10% on the day during the after-hours session, today had a much different feel for Nvidia investors.

After opening at fresh all-time highs, the stock spent the entire day retracing its early gains, just to close basically unchanged at +0.10%. Things look pretty dire tactically on a candlestick chart, with a potential failed breakout in the making.

However, when we eliminate the intraday noise and look at the trend with a line chart, NVDA still looks great. Here it is, zoomed out a little over two years:

Following its previous earnings report in May, the stock surged past its old record highs and rallied to the first Fibonacci extension of the 2022 drawdown. After hitting this target back in July, NVDA has been consolidating in a short-term continuation pattern. While momentum has certainly been waning the past few months, it has remained out of oversold territory, which is more than some other tech stocks can say.

We think this strong primary uptrend could eventually resume higher, but not until the pivot highs and 161.8% Fibonacci extension are taken out. We’ll also be looking for an overbought momentum reading as confirmation of the breakout.

2/ Bearish Engulfing in Software

Outside of NVDA and a few other earnings winners, the entire technology space was lower today. The market steadily sold off following a gap up on the open, leaving us with an abundance of solid red candles. Many of these candlesticks have taken the shape of bearish engulfing formations.

A bearish engulfing candle forms when the stock opens above the prior day’s high but gives back those gains during the session and closes beneath the prior day’s low. In other words, the range of the previous day is “engulfed” by the action of the current day. Here’s an example from today in the SPDR S&P Software ETF (XSW):

XSW is not just a great illustration of the reversal candles we’re seeing today, but it is also the perfect depiction of the most important theme in the market right now, which is overhead supply.

Notice how today’s bearish engulfing candle is forming at a key resistance zone marked by the first-half highs from this year as well as those from August 2022. The anchored volume-weighted average price (AVWAP) from the all-time highs also coincides with this $132 level, representing the average buyer since prices peaked in 2021.

As long as the software index is trapped in this range, we expect more messy price action for the foreseeable future.

3/ Keep Your Eyes on Energy

Energy remains top of mind and top of the sector leaderboard.

It’s been an adjustment for many investors over the past couple years. But energy’s outperformance isn’t a novel phenomenon.

Check out the Energy Sector ETF (XLE) relative to the Technology Sector ETF (XLK), showcasing the overarching trends in secular leadership:

Before tech reigned as king, energy stocks drove the market for the first decade of the 2000s. Interestingly, the XLE/XLK ratio is finding support and resolving higher at its former 2000 low—where the last secular trend favoring energy began.

Bottom line: While the broader market struggles, energy is settling into the driver’s seat against a familiar backdrop of dollar strength and elevated rates.

While everyone loves a good story—and there is no shortage of narratives surrounding the tech space—our job as traders and investors is to follow the puck!

4/ Ding Dong. It’s the Dollar!

The greenback is flexing its muscle, climbing above its July pivot highs.

That means more pain for major global currencies as the pound, euro, and yen tumble. But they’re not the only ones.

Here’s the Vietnamese dong (USD/VND) highlighting the renewed U.S. dollar strength:

The USD is breaking out of bullish reversal patterns against other low-profile currencies,  commonly called “exotics.” These breakouts reveal one thing: broadening U.S. dollar strength.

If upside resolutions like the one in the USD/VND pair hold, we imagine that the recent dollar bounce could turn into a sustained rally—not the best scenario for risk assets.

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Originally posted 24th August 2023