Semiconductors have been real outperformers last year. By far the strongest performer in the semiconductor space was NVIDIA as well as AMD.
NVIDIA, symbol NVDA, went up fivefold in less than a year. That is impressive to say the least.
However, right now, NVIDIA seems to be setting a major double top. Note the purple circle on the first chart. A double top was set in February, and a lower high was set in March. That is really concerning for NVDA, and it seems that sellers are taking control over buyers.
The downside potential in NVDA is significant. It is not that the financials of the company are not good. With a 32x P/E ratio, great turnover and EPS figures, there really is not a financial problem. The issue is that the stock got ahead of itself. At a certain point, too high too fast needs to correct.
Ultimately, NVDA can come down, until its 90 week moving average, which is around $55. Not that this our forecast, but it’s a potential downside target for the short to medium term, depending on how broad markets will act.
Now, if NVDA would fal, which we anticipate, it would have major implications for stock markets. The reason is that semiconductors have done very well since stock markets recovered early 2016. But as they have been leading stocks higher, stock markets need a strong performance in semiconductors to remain in a bullish environment.
As explained on below chart, weakness in semiconductor stocks, which translates in a break down below the rising trend (purple rising trend line on below chart) could create weakness in stock markets as a whole. Watch 975 in the semiconductor index SOX as a breakdown price level.
A sustained break below 975 points in SOX would also trigger short selling opportunities in the semiconductor index in case this comes with weakness in the stock market indexes.
