Stock Of The Day: False Breakout In Nvidia?

NVIDIA Corp (NASDAQ:NVDA) is trading lower on Thursday. The company reported earnings that exceeded estimates.

It may be staging a classic false breakout.  This would suggest a continued move lower. It's why Nvidia is the Stock of the Day.

• What’s weighing on NVDA shares?

It is unfortunate that technical analysis has a dubious reputation on Wall Street. But it isn't surprising.

Most technical analysts don't understand market dynamics and price action. They look for patterns on charts without understanding why these patterns form and what they mean.

This is why so many technical analysts are unsuccessful.

Chart patterns are graphical illustrations of the supply and demand dynamics playing out in a market. A classic ascending triangle pattern formed on the chart of Nvidia. These are considered bullish patterns.

As you can see on the chart, there was resistance around the $193.40 level going back to December. The line is horizontal because the sellers were patient. They were okay with staying at their prices and waiting for the buyers to come to them.

But over the same time period, traders and investors who wanted to buy became anxious and impatient. They were willing to pay successively higher prices. This is why the support line of the pattern is ascending.

The ascending triangle is bullish because it is a graphical illustration of a market with patient and complacent sellers, and aggressive and impatient buyers. Regardless of the market, these dynamics can set the stage for a move higher.

But successful traders know that popular stocks such as Nvidia can act very differently than analysts and pundits anticipate. Just because a stock gets above resistance, it doesn't mean it will stay there.

It could end up being a false breakout. It looks like there is going to be a breakout, but then the stock reverses quickly and heads lower. As you can see on the chart, that may be the case today with Nvidia.

Successful traders understand the dynamics that form patterns on charts. But they also understand that there are no rules in markets, only guidelines. The ability to remain flexible is one of the main reasons for their success.

Photo: Michael Vi via Shutterstock