Nvidia Corp: Rising Bullish Sentiment Could Signal a Pullback

Globe and Mail

4 days ago

Nvidia Corp (NVDA)
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Nvidia's stock has been on a steady rise since the stock bottomed in April, fueled by investor enthusiasm around artificial intelligence (AI), data centers, and the company's commanding lead in GPU technology. Today the stock has just reached a new record high, crossing over the $160 mark, as retail and institutional investors continue to open and add new positons. However, history and technical analysis suggest that such euphoric sentiment could be a contrarian red flag.
Euphoria Can Mark the End of a Rally
In financial markets, extreme bullishness often coincides with market tops. When nearly everyone is optimistic, it usually means the good news is already priced in. Nvidia's valuation has surged to levels that leave little margin for error. At these elevated prices, even a minor disappointment — in earnings, guidance, or macroeconomic signals — could trigger a sharp correction.
Investor positioning reflects this. Options data and retail inflows show a crowded long trade, which historically tends to precede profit-taking, especially when fundamentals don't accelerate fast enough to keep pace with inflated expectations.
Technical Indicators Point to Market Hesitation
Beyond sentiment, technical analysis is flashing warning signs. The market currently shows uncertainty with a negative bias — a state in which buyers and sellers are indecisive, but bearish momentum is subtly gaining strength. This is evident in Nvidia's recent price action, marked by tightening trading ranges, waning volume on up days, and sharp reactions to intraday resistance levels.
Most notably, a three-candlestick top reversal pattern has emerged on the daily chart — a classic bearish signal. This pattern typically forms at the end of an uptrend and often precedes a reversal in price. The setup consists of a strong upward candle, followed by a small-bodied candle indicating indecision (a doji or spinning top), and capped off with a bearish engulfing or downward candle that closes below the previous two. This signals fading bullish momentum and the emergence of stronger selling pressure.
Lack of Consensus, But Bearish Tone Rising
Adding to the case for caution is the evident lack of consensus among traders. While long-term bulls remain optimistic on Nvidia's fundamentals, short-term traders are showing signs of retreat. Recent selling into strength, hesitant follow-through on breakouts, and increased short interest hint at growing doubts about the sustainability of the rally.
Moreover, breadth in the semiconductor sector is narrowing, with fewer names participating in the upside. This divergence can be a leading indicator that a sector-wide pullback is looming.
Peak Optimism Could Spell Reversal
Nvidia's leadership in AI and chips is not in question, but the stock's parabolic run may have outpaced even its impressive fundamentals. When sentiment becomes overly bullish, the market often sets itself up for a reversal. Combined with bearish technical patterns and a shifting tone among traders, Nvidia's chart suggests caution may be warranted.
Investors holding long positions should consider tightening stop-loss levels or locking in gains. Meanwhile, traders may see this as an opportunity to play a short-term pullback if bearish confirmation unfolds.
In the markets, extreme optimism often sows the seeds of the next decline, of which Nvidia may possibly be at that inflection point.