NVIDIA produces chips that power generative artificial intelligence (AI), a type of AI that can create new content, such as text and images, in response to user prompts. That’s the kind of AI underlying ChatGPT, Google’s Bard, Dall-E and many of the other new AI technologies.
The stock has been on a stellar bull run over the past seven months, thanks to investors’ positive outlook on generative artificial intelligence and its dominant positioning in that space. The company’s specialty in graphics processing units (GPUs) and their implications toward undergirding innovations and AI, and machine learning has attracted investors’ interest in recent months.
The share price is up a staggering 287% from its October 2022 low to its all-time high of $419.38 posted on Tuesday, which helped the company to reach $1 trillion market cap that day. Following outstanding earnings update last week the technology stalwart gapped up strongly, gaining more than 30% in a day; however, it formed an island reversal pattern, which points to a likely consolidation or a pullback in the short-term.
NVIDIA reported cracking earnings and a strong revenue forecast for the year ahead, smashing Wall Street estimates. Fuelled largely by the recent boom in AI, the earnings report fuelled the share price higher, lifting NVIDIA’s position as one of the largest publicly traded company in the world.
After reaching extremely overbought momentum levels on Wednesday, the rally has fizzled out and the price closed 5.68% lower, as investors engaged in some profit-taking. The deep pullback is not unusual, as any sharp and sudden rallies usually reverse quickly as traders trim profits. The pullback in NVIDIA shares was also helped by the disappointing outlook from rival C3.ai Inc. which sparked a selloff in its shares. AI software firm C3.ai fell more than 20% in U.S. premarket trading on Thursday, extending Wednesday’s drop of 9%.
NVIDIA now trades at around 45 times forward PE, but it had traded at a multiple of 62x on the 18 th of May, a week before the company’s quarterly update. Although NVIDIA represents a promising tech bandwagon aligned with the next generation of digital innovations, in the short-term the stock is strongly overbought and due to correct either in time or in price.
As long as minor support of $366 holds the share price is likely to unwind its overbought momentum conditions in time, which means the stock is likely to trade in a narrow range in the coming weeks. Should the price break below its support, the island reversal pattern would be confirmed and further weakness to $340 could be seen.
Overall, the primary up trend is in full swing and at this juncture in time the charts point to a short-term retreat, which is seen as healthy for the sustainability of the long-term bull run. Permabears should not get too excited as the long-term outlook for the share price remains positive.
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