Mr. Elliott Says the Party May Be Over for Nvidia

01/12/2011 8:02 am EST

Focus: STOCKS

Shares of Nvidia (NVDA) have accelerated upward at a clip rarely seen in most stocks, especially after gapping higher on January 6, 2011 (last Thursday's session). Can this stock maintain its current rate of trajectory, even though its very obvious five-wave Elliott pattern suggests that this party is nearly over? Here's a closer look at the daily chart of this high-flying Nasdaq 100 component.



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One of the best features of Elliott Wave trading/investing is the ease with which other technical tools can be used to help better identify major wave turning points. When long-term money flow and momentum indicators begin flashing negative divergence warnings even as a fifth wave really starts to extend, you have a very reliable indication that the trend is getting close to a major top or bottom.



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Sometimes it's hard to pick out clear and concise Elliott Wave patterns in certain stocks and futures contracts. Low-volume, thinly traded issues can be tough to trade with this technique, as are stocks that seem to spend the majority of their time chopping sideways for months at a time. NVDA is not one of those kind of stocks, however, and you'll agree that what we see here is a near-textbook- quality, five-wave Elliott pattern, one that appears to be getting very close to its ultimate high price (for this particular series of waves, that is).

So far, wave three is the longest, and wave five has now exceeded the length of wave one, implying perhaps a bit more of a rise to come. Wave four descended nowhere near the top of wave one, so at least the essentials for a valid Elliott count are all present.

One nice aspect of the Elliott Wave technique is that you can easily use it in conjunction with other technical tools to help make your market timing easier. For example, take a look at the long-term Chaikin money flow (CMF)(144) indicator at the bottom of the chart. Although the histogram is indeed in positive territory, note that the absolute value of the indicator is far, far less than it was at the major swing highs of January 2010 and September 2009.

Meanwhile, NVDA has gone on and exceeded those prior swing highs on the price chart, indicating a very pronounced and potentially bearish price/money flow divergence. Yes the stock is extremely strong right now, but the fact that a full five-wave pattern is nearly complete at the same time that a substantial negative divergence is playing out should be sufficient warning to anyone now currently long this stock. In addition, NVDA only boasts average earnings growth potential over the next year or so, giving existing longs in this stock even more reason to either begin scaling out and/or running a much closer trailing stop-loss.

Finally, just for fun, I splashed that pink horizontal bar near the $14.00 price area, one that coincides with the low of wave four—$14.00 just so happens to be the full 50% retracement level of the complete, gigantic uptrend that may now be ready to fizzle. In major trend reversal situations, the 50% retracement area is frequently a good place to look for a countertrend bounce, depending on the situation. Interestingly, the top of wave three also coincides with the Fibonacci 62% retracement level of the same, enormous five-wave pattern…for now. As always, in the world of Elliott, you always need to be ready to revise your wave count just in case the unexpected happens. After all, Elliott Wave isn't a perfect analysis technique, but at least it can (and usually does) help keep even more imperfect human beings like us on the right side of the major trend in any given market. Spend some time locating clear Elliott patterns on your own charts and see if it doesn't help make a major improvement in your trading results.

By Don Pendergast of ChartW59.com

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