Nvidia stock nears ‘death cross.’ Should investors fret?

A pattern that is looming in the charts may deter investors who are searching for a time and reason to buy Nvidia Corp. stock for a little longer.

This is due to the fact that the stock (NVDA) dropped almost 40% more before bottoming out the last two times the bearish pattern emerged. 75% of the time the pattern appeared during the stock’s public history, the selloff persisted.

This particular pattern is called a “death cross.” At that point, the 200-DMA, which is thought to be a boundary between longer-term uptrends and downtrends, is crossed below the 50-day moving average, a popular short-term trend tracker.

Based on the moving averages’ current trajectories, that bearish pattern may emerge for the first time in around three years for Nvidia’s stock as early as this week, most likely on Friday.

According to FactSet data, the 50-DMA is now trading at around 129.04 on Monday, down from $129.30 on Friday and down by an average of 30 cents per day over the previous five days. In the meantime, the 200-DMA increased by around 6 cents every day over the previous week, from $127.64 on Friday to $127.68 today.

Naturally, the moving averages’ paths may alter because some people think that the annual GTC conference for developers next week could spur additional advances.

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The stock closed Friday at $121.67, up 5.3%. It has fallen 18.6% since the record close on January 6 but has risen 13.7% since closing at a six-month low on March 10.

On April 20, 2022, the stock closed at a split-adjusted $21.48, marking the final death cross. The stock dropped another 47.7% before plunging to its lowest point on October 14, 2022, having already dropped 35.7% from its record closing of $33.38 on November 29, 2021.

About six weeks after it had already fallen 31.1% from a record close, the previous one surfaced on Nov. 13, 2018.

About six weeks later, the stock fell another 36.1% before plunging to its lowest point.

When Nvidia went public in January 1999, 12 death crosses have occurred. After nine of them, the stock has dropped even further, averaging 41% (median of 36%). The decreases varied from 6.5% following a crossover on May 4, 2012, to 78% following the death cross on April 24, 2002.

It could be as short as one week or as long as nine months between the death crosses and the bottoms.

When the stock didn’t fall after the crosses, it had already fallen two days before the July 29, 2015, crossover, a month before the April 25, 2007 crossover, and four days after the July 20, 2006, crossing.

If there is a silver lining to the stock’s current position, it appears to be reasonably priced when compared to the consensus analyst projections for earnings per share over the upcoming year.

After hitting a low of 23.4 earlier this week, the price-to-earnings, or P/E, ratio is now at about 25.9.

The P/E ratio was even higher, at 36.7, when the final death cross materialized, causing a further selloff in the company. Additionally, the P/E ratio was lower, at 22.3, when the death cross previously occurred in July 2015, after the market had already bottomed.