To paraphrase the great Warren Buffett, it’s generally a good idea to be fearful when others are greedy and greedy when others are fearful. After all, the best rewards typically stem from opportunities that few others see — opportunities that require courage and conviction. With that in mind, it’s all too easy to want to dive into Nvidia (NASDAQ:NVDA) right now.
As Money Morning’s Chris Johnson first reported last week, NVDA stock printed the Death Cross. A phenomenon followed by technical analysts, this setup symbolizes the moment when the longer-running moving average falls below the shorter-running average; usually, the 200-day moving average falling below the 50 DMA. It underscores a sustained erosion of upside momentum, potentially signaling a downturn or outright bear market cycle.
In many cases, investors look at the death cross with trepidation. Further, Johnson was quite adamant about the implications for NVDA stock: “NVIDIA shares are heading lower. This is NOT the bottom for this stock.”
Still, it’s all too tempting to want to disagree with the above assessment. Nvidia represents a key player — arguably the most important player — in the artificial intelligence race. Its graphics processors are essential for supporting the immense loads that generative AI protocols demand. Not surprisingly, over the past five years, NVDA stock gained 1,700%.
At the same time, NVDA also appears to be charting a pattern somewhat reminiscent of a head and shoulders. Combined with the flashing of the death cross, I offer the same opinion as Johnson: this really isn’t rock bottom.
Ultimately, it’s difficult to sway investors with opinions, no matter how well reasoned. Therefore, Johnson primarily relies on facts to deliver his assessment on NVDA stock. As he correctly pointed out, prior to this year’s signal, the last death cross that the security printed was in April 2022. Most significantly, it took almost a year before NVDA recovered.
Going back over the trailing decade, the semiconductor giant incurred four death crosses:
Of the three times that the death cross materialized between 2015 and 2022, only the first instance represented a contrarian bullish trade. In the death crosses of 2018 and 2022, investors had to wait more than half-a-year to see a positive return.
What’s even more worrisome, the average loss six months out following the last two death crosses came out to a stunningly horrific 31.83%. My fear is that this time around, if a broader economic downturn occurs, it could be several years before NVDA stock recovers.
As Johnson mentioned, investors may want to consider protecting their position in Nvidia with short wagers. At this juncture, buying put options — such as the $92 put expiring Dec. 19 of this year — would not be an unreasonable idea.
Historical trends demonstrate that not only should investors read the death cross at face value, NVDA stock could suffer big losses before making a recovery.
