NVIDIA: A Major Indicator Just Flashed Sell, But Should You?

Key Points

• NVIDIA's MACD just turned bearish, a rare sell signal after a 100% rally.
• The stock's RSI is also extremely overbought, while its P/E ratio has jumped since April. 
• Analysts, however, are overwhelmingly bullish, with targets as high as $220. 

Shares of tech giant NVIDIA Corp NASDAQ: NVDA were trading roughly flat on Tuesday afternoon, after hitting yet another record high, just shy of the $180 mark, earlier in the day.

This latest milestone caps off a staggering 100% run since April—an almost absurd move for a company now worth $4 trillion.

Aside from a minor pullback quickly bought up last week, it's been practically all one-way traffic.

It's a dream setup for momentum traders and long-term bulls alike. But, under the surface, one of the market's most trusted technical indicators has just flashed a warning.

MACD Sends a Bearish Signal Amid Record Run

The Moving Average Convergence Divergence (MACD) is a popular momentum indicator used to identify changes in a trend's strength, direction, and duration. It's derived from the difference between a stock's 12-day and 26-day exponential moving averages. A bearish MACD crossover, like the one that just occurred with NVDA, happens when the shorter-term average crosses below the longer-term one, signaling a potential shift to downward momentum.

It's a relatively rare event for a stock in such a strong uptrend, which traders often interpret as a signal to reduce exposure or brace for a pullback. While it's not 100% reliable, there are enough examples of it preceding a dip in NVIDIA's stock in recent years to make it worthwhile to note. 

For example, in June of last year, the MACD had a bearish crossover right as the stock began a 35% slide. 

RSI Flashes Orange, Confirming Overbought Conditions

It might be easy to ignore the warning in isolation, but backing up the bearish tint to the MACD is NVIDIA's Relative Strength Index (RSI), which sits at a fairly frothy 71. For those who don't know, a popular indicator that measures the speed and change of recent moves and is used to quickly identify overbought or oversold conditions in a stock's momentum indicator, a stock's RSI is another.

A reading above 70 is considered extremely overbought and can, in many cases, precede a term break of at least a week. So, with NVIDIA's MACD and RSI now leaning towards a potential reversal, it's harder for investors to ignore.

Lofty Valuation Raises Stakes for Earnings

Then there's the valuation. NVIDIA's price-to-earnings (P/E) ratio has climbed from 35 in April to nearly 60 today. The P/E ratio, which compares a company's share price to its earnings per share, is a quick way to assess how richly the market is pricing in future growth.

In other words, given how it has risen with the stock over recent months, NVIDIA can't really afford any slip-up in August's earnings report. The numbers will have to not only justify the recent rally, but justify the next leg of it, too; otherwise, there could easily be a rapid bout of profit-taking. 

Despite Signals, The Street Remains Bullish

However, analyst sentiment remains overwhelmingly positive despite the flashing warning lights from a technical and valuation standpoint.

Jefferies, Bank of America, and Needham all recently reiterated their Buy ratings, with refreshed price targets ranging as high as $220. From the $176 that NVIDIA was trading at on Tuesday, that's pointing to further upside of at least 25%.

And it's not just the analysts. Investor appetite for anything AI-related is insatiable, and NVIDIA is still the most straightforward way to play that megatrend. Its leadership in graphics processing, data center infrastructure, and custom AI chips remains undisputed.

It's already one of the year's standout performers, and there's little to suggest that all that momentum will disappear.

So, Should You Sell?

For long-term investors, this might well be just noise. The MACD and RSI are short-term indicators, and NVIDIA's fundamentals and strategic positioning remain exceptional. However, it might be time to pause for those of us with shorter time horizons, or anyone thinking of jumping in now.

The more prudent move here may be to wait and see how the stock responds to this technical pressure and trades into next month's report. It's not due for another few weeks, but it's looking like the next significant catalyst, and Wall Street will be watching closely.

Until then, the stock is left in the hands of wider-market sentiment, short-term trading momentum, and, for now, technical indicators.