Former Leader Falls Hard

Catching Up

Back in July 2018, I posted this tweet highlighting my view that Nvidia (NVDA) was throwing off mixed signals:

NVDA Tweet - looks like distribution

At the time, NVDA was in the middle of an upsloping trading range, and the stock’s struggle to make upward progress was the first clue to the possibility of distribution taking place. In addition, the weakness evident in the July rally attempt indicated a lack of demand – also bearish. However, as leadership stocks often do, NVDA was still making higher highs and higher lows, while volume and volatility were drying up as the range progressed.

What Happened Next?

Since that July Twitter post, NVDA completed its Distribution trading range, and a relentless downtrend has pummeled the stock down 55% from its high. This displayed a particularly nasty way to conclude its epic run from $20 just 3 years ago:

NVDA distribution trading range

Following the lackluster demand in July, NVDA made another jump to new highs in August, with seemingly bullish characteristics as it started. But as the swing developed, demand steadily declined. This upthrust was met with some selling, and then one last thrust to new highs put a final end to the bull run. From there heavy selling and capitulation on the way down produced a Major Sign of Weakness (MSOW). A few days of short covering could only muster a minimal gain, and the next phase of the mark down began in earnest.

Were there any other clues in the development of this trading range that would indicate Distribution in process? Notice where the red volume (supply) spikes are occurring. Supply is coming to the market in force off the top of the range, the ideal place for smart money to unload their shares to weak hands who are caught up in the euphoria of the higher highs being made.

Trading Tactics

It would have been easy to get long halfway through this range (I did!), considering NVDA was a strong leader for many years, and trends tend to persist. However, as the evidence for distribution piles up, it is imperative to obey your stops and keep an open mind when watching the action.

Given the quickness with which the downtrend got underway, it may have been difficult to get short near the top of the range. On the back of the Upthrust After Distribution (UTAD), the price began to fail pretty quickly. This is entry #1 for aggressive traders. The capitulation days on Oct 10 and Oct 19 provide entries #2 and #3. This type of action is a dead giveaway that something is different, and the MSOW is underway. Entry #4 comes as the LPSY failure occurs.

NVDA downtrend entry points

The huge gap down on November 16 and the following 2 day follow-through provide the ideal place to cover a short position. The oversold nature of the action, combined with extremely high volume is characteristic of a selling climax, which is typically succeeded by a rangebound condition.

Where are we now?

In mid-November, NVDA experienced a Selling Climax (SC), which was followed by an Automatic Rally (AR) through the end of the month. The stock appears to be range-bound, and we should analyze its development as a cause for the next move is built. From just this action, we see a decrease in supply on the Secondary Test (ST), but the stock’s inability to hold above the SC low indicates weakness.

What other evidence of distribution are you able to identify? Will NVDA go lower, or is the worst over? Leave your comments below.

TS

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