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NVIDIA Corporation (NASDAQ:NVDA) may be about to head lower. The stock is testing important support.
There's a good chance this support breaks. There was recently a ‘higher low' on the chart. This is why it's our Stock of the Day.
There tends to be support at levels that had been support before. As you can see on the chart, Nvidia is at a one.
This happens when some of the investors and traders who sold while the stock was at support come to regret their decision to do so after it rebounds. Some of them vow to buy their shares back.
But they will only do so if they can buy them at the same price they were sold at.
So, when the shares eventually reverse and drop back to the support, they place buy orders. And if there are a large number of these orders it will create support once again at the level.
Sometimes markets rally after they reach support levels. This happens when some of the buyers worry that other buyers will be willing to pay a higher price. They know that this is who the sellers will go to.
Because of this, they raise the prices they are willing to pay. Other worried buyers see this and do the same thing. It results in a snowball effect or a bidding war that forces the price up.
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But sometimes the support level breaks. This sets the stage for a move lower.
If the price drops below the support level it illustrates an important supply and demand dynamic. It shows that the traders and investors who created the support with their buy orders have left the market.
With these buyers out of the way, the sellers are forced to push the price lower if they want their trades to be executed. This will pull buyers off of the sidelines and into the market. But it could also force the shares into a new downtrend.
One way a trader can gain insight into whether the shares will rebound or the support will break is to determine whether there has been a ‘lower high'. As you can see on the chart, that is the case with Nvidia.
The high that formed on July 11 was lower than the one that formed on June 20. This price action occurs because the sellers are getting more aggressive as time passes. They are willing to sell at lower prices.
If lower highs formed as a stock trended lower before it got to support, it's a good indication that the support will break. And it may be about to happen with NVIDIA.
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Posted In: NVDA
