NVIDIA Stock Rallied 8%, But 3 Signals Point to a Reversal

NVIDIA stock rose by 8% between March 30 and April 1 after a $2 billion investment in Marvell Technology. This rally was fueled by short covering and retail investor activity. However, institutional buying pressure appears to be waning.

Chaikin Money Flow (CMF), a key indicator of institutional buying, diverged from the upward price movement. The indicator dropped to -0.23 during the rally. This suggests the move lacked institutional support.

The broader market backdrop adds uncertainty. The S&P 500 ETF and United States Oil ETF have shown an inverse relationship in 76% of the past 50 sessions. Rising oil prices could delay Federal Reserve rate cuts, which might hurt growth stocks like NVIDIA.

Why Did the Rally Lack Institutional Support?

Institutional investors have been reducing their exposure to NVIDIA. This has created selling pressure that could prolong volatility. Institutional selling can have a pronounced effect on large-cap stocks like NVIDIA.

Retail investors and short sellers appear to be the main drivers of the recent price movement. This is evident from the divergence in CMF and the lack of follow-through buying after the rally.

What Do Options Traders Suggest About the Outlook?

Options traders have shifted their positions in NVIDIA over the past week. Long positions have been closed, while short bets have been added. This behavior typically signals skepticism about the continuation of a rally.

A head and shoulders pattern is forming on NVIDIA's daily chart. The stock failed to close above the 20-day EMA at $176, reinforcing the bearish setup. A breakdown below $160 would confirm the pattern and potentially lead to a 15% drop.

Resistance levels remain unbroken. The 50-day and 100-day EMAs are at $180 and $181, respectively. A move above these levels could reverse the bearish pattern.

How Are Competitors and Market Conditions Affecting NVIDIA?

The AI memory market has experienced a selloff following Google's TurboQuant algorithm and OpenAI's spending reductions. This has led to a 9% drop in NVIDIA's stock price. The algorithm reduces the memory footprint of AI models, potentially impacting demand for NVIDIA’s hardware.

NVIDIA’s stock is now near the neckline of a head-and-shoulders pattern. A breakdown could project an 11% drop. The 200-day EMA at $174 is a critical level to monitor. A rebound above $165 could weaken the breakdown threat.

Analysts remain divided. UBS analyst Timothy Arcuri maintains a Buy rating with a $245 price target. He views the memory selloff as a short-term issue rather than a structural one. However, others warn of a valuation re-rating if growth expectations are not met.

NVIDIA's forward P/E has compressed to multi-year lows. This reflects macroeconomic and geopolitical concerns, as well as competitive threats from emerging technologies. These factors could further pressure the stock if growth slows or supply issues persist.

Despite the bearish signals, some analysts remain optimistic. A 12% gain is projected over the next year, reaching $197, based on strong operating margins and a robust near-term pipeline. This forecast assumes a price-to-earnings contraction as growth slows.