Two Scary Charts – Microsoft & Nvidia

Share price charts are decision systems. On this monthly candlestick chart of Microsoft, a megacap, we can see that when the three moving averages I use start bunching, this is a precursor to a significant move. I think of it as crouching to spring.

Because Microsoft is in a long-running bull market, like the US stock market, the big move after these bunching episodes is usually up. But not always. When all three of the averages roll over and point down, this can be an indicator of more significant weakness.

Just such a rolling over is occurring now and Microsoft is a key stock.

Nvidia may be forming a head and shoulders top. The neckline is around the current price so a sharp breakdown from here would be bearish. The behaviour of the moving averages already gives grounds for caution.

The iShares Semiconductor ETF, which tracks the performance of US-quoted semiconductor shares, is in an established downtrend.

It is not about fundamentals. It is about supply and demand for shares. Looking at the US stock market as a whole, and especially the Nasdaq 100 Technology index, it is as though the tide is going out.

This chart is shaping up for a big move. There is a hint that it is going to be down with the shorter green moving average breaking down below both the longer dated moving averages, but the picture is not yet conclusive. If all three averages turn down and the index drops below round number support at 10,000, that would set alarm bells ringing.

Even if it does break down, experience suggests that weakness will be temporary and shares will eventually recover to new peaks. Most likely though rotation in the stock market would mean new leadership for a new bull market.

There appears to have been a shift in market sentiment. Prices will always go up and down, but the down moves are becoming more forceful. This is a sign of share prices trending lower.

Also alarming is the behaviour of the quantum computing stocks. These are the ultimate newsflow stocks. Their performance measures investor sentiment more than fundamentals.

Shares in quantum computing favourite, Rigetti Computing, which is years away from generating profits, exploded in the last three months of 2024. The shares rose over 30-fold. If we use this as a measure of speculative fervour in the overall stock market, the reading could hardly be higher. Now may come the hangover.

Strategy – Be Careful!

Share prices measure sentiment as much, if not more, than they measure fundamentals. Prices peak when the outlook is most exciting. Have we passed that point with shares like Microsoft and Nvidia? If we have a period of falling prices may lie ahead.

I say this with great caution. Bull markets are nothing if not resilient. Nevertheless, momentum seems to be fading. Nvidia has been reporting incredible growth in sales and profits, but its shares have made no progress for 10 months. The implication is that if growth comes off the boil, the line of least resistance for share prices will be down.

Cash in a bear market is a wonderful thing to have. Ask Warren Buffett. Berkshire Hathaway ended 2024 with $334bn in cash, double the figure of a year earlier.

In a bear market, the strategy I outlined in the preceding alert of buying exciting stocks every time the shorter weekly moving average turns higher can work well. Invest equal amounts each time and it becomes a variant on dollar-cost averaging. Worst case you may end up buying three, four, five times before shares start to rally in earnest, but you should win in the end. Try it with small amounts in a handful of exciting shares.

I am going to monitor how the strategy would work with the 10 shares listed in the last alert, dated 3 March 2025. None of these is presently giving a buy signal.