Market update – DeepSeek Hits Big Tech

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A surge in interest around China’s AI model, DeepSeek, shook markets today, with the Nasdaq falling 3.07% and Nvidia plunging nearly 17%. This development raises concerns about the sustainability of AI investments, particularly whether costly infrastructure like chips and data centers will deliver returns. Nvidia, valued at over $3 trillion, faces growing skepticism as DeepSeek emerges as a low-cost rival.

On January 8, we highlighted Nvidia’s “outside reversal” (white arrow on chart below) when it hit an all-time high after unveiling its compact AI superchip, the GB10, before retreating to test its 50-DMA. At the time, we warned that failure to hold support at 127.00 could lead to a deeper correction. See our full analysis here. Below is Nvidia’s updated chart.

DeepSeek announced that its R1 model rivals OpenAI’s o1-mini, unveiled in September, while training costs for its latest model totaled $5.6 million—far lower than the $100 million to $1 billion cited by Anthropic CEO Dario Amodei for similar projects. The company trained its V3 model using just over 2,000 Nvidia chips, compared to the tens of thousands typically required for comparable AI systems.

The company said training one of its latest models cost $5.6 million, compared with the $100 million to $1 billion range cited last year by Dario Amodei, chief executive of AI company Anthropic.

“This new AI challenger has spooked investors,” said AJ Bell investment director Russ Mould. “Its assistant is free, operates on lower-cost chips, and uses less data—posing a serious challenge to Western AI leaders.”

DeepSeek’s rapid rise is escalating the AI rivalry between the US and China, particularly in light of Stargate—a US-based joint venture by OpenAI, SoftBank, Oracle, and MGX to expand data center capacity.

The news of DeepSeek’s emergence sent shockwaves through the market, with chipmakers suffering significant losses on fears that the availability of lower-cost alternatives will erode their pricing power. This pressure contributed to a notable sell-off in the Nasdaq tech index.

Conversely, industrial companies poised to benefit from more affordable AI solutions experienced gains, as reflected in the rally of the Dow Industrial Average Index. This market reaction underscores the shifting dynamics in the AI landscape, where cost-efficient technologies are reshaping winners and losers.

Stay tuned!

The Rise of DeepSeek: Redefining the Future of AI?

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The artificial intelligence (AI) landscape is on the brink of a seismic shift with the advent of DeepSeek, a Chinese startup that has developed an innovative AI model capable of rivaling top-tier offerings from global leaders such as OpenAI and Meta. DeepSeek’s groundbreaking approach, which combines cost-effective hardware with optimized software solutions, threatens to upend the industry’s reliance on ultra-expensive infrastructure. This development has far-reaching implications for the AI sector, democratizing access and reshaping the competitive dynamics.

Cost-Effectiveness at the Core

DeepSeek’s most compelling proposition is its ability to deliver high-performing AI at a fraction of the cost. While companies like OpenAI and Meta have poured billions into developing their models and rely on advanced chips manufactured by Nvidia and Taiwan Semiconductor Manufacturing Company (TSMC), DeepSeek claims to have achieved comparable results with an investment of under $6 million.

This dramatic reduction in cost is made possible through the use of less advanced hardware paired with resource-optimized software. Instead of focusing on the most cutting-edge chips, DeepSeek leverages innovative methodologies to maximize efficiency, reducing overhead and making AI development more accessible to smaller players.

Implications for the AI Market

  1. Democratization of AI The cost barrier to AI development has historically excluded smaller organizations and emerging economies from participating in cutting-edge research and applications. DeepSeek’s model opens the door for more players to enter the field, fostering innovation and competition. This democratization could accelerate the development of localized AI solutions tailored to unique cultural, linguistic, and economic contexts.
  2. Pressure on Industry Giants The AI chip market, dominated by Nvidia and TSMC, faces mounting pressure as DeepSeek’s approach gains traction. If companies can achieve similar performance without relying on high-end processors, demand for these expensive chips may decline, forcing industry leaders to adapt their strategies. This shift could lead to a re-evaluation of pricing models and greater investment in alternative, cost-effective technologies.
  3. A Paradigm Shift in AI Development DeepSeek’s success signals a broader trend towards optimizing efficiency over sheer computational power. This paradigm shift encourages a rethinking of AI’s development pipeline, emphasizing smarter resource allocation and sustainable scaling. Companies that adapt to this model are likely to thrive in a more cost-conscious market.
  4. Open Source as a Balancing Force One significant way to mitigate the geopolitical and market risks associated with DeepSeek’s dominance is through open-source AI development. By openly sharing methodologies, software optimizations, and frameworks, other companies and researchers can replicate and enhance similar cost-effective models. This approach reduces reliance on a single player or region, spreading innovation globally and fostering a collaborative environment. Open-source initiatives also encourage transparency and trust, ensuring that advancements are not limited to specific geopolitical interests.

Challenges and Considerations

While DeepSeek’s claims are promising, several challenges must be addressed before their approach can be widely adopted:

  • Performance Validation: The long-term viability and performance of models developed using less advanced hardware remain to be fully validated. Any significant gaps in reliability or scalability could temper enthusiasm for this approach.
  • Adoption Barriers: Established players with entrenched investments in high-end infrastructure may be slow to adopt or recognize the benefits of DeepSeek’s methodology.
  • Geopolitical Concerns: As a Chinese company, DeepSeek’s rise may spark geopolitical tensions, particularly in the context of ongoing tech rivalries between the U.S. and China. Trade restrictions and intellectual property disputes could impact its global influence.
  • Open-Source Dynamics: While open-source development has enormous potential, it also introduces challenges related to intellectual property rights, monetization, and the risk of misuse by malicious actors. Ensuring that open-source models remain secure and responsibly utilized will require coordinated global efforts.

Conclusion

DeepSeek represents a bold new direction for the AI industry, challenging assumptions about the resources required for cutting-edge innovation. By proving that high-performance AI can be achieved cost-effectively, DeepSeek has the potential to democratize access, disrupt industry giants, and inspire a more inclusive and sustainable AI future. The promotion of open-source development could further amplify these benefits, reducing risks associated with geopolitical dependencies and fostering global collaboration. As the industry continues to evolve, all eyes will be on DeepSeek to see if it can deliver on its promises and truly change the game for AI.

Stay tuned!

Market on Edge: Is Nvidia Signaling a Bigger Pullback Ahead?

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Let’s start with the hottest stock in the hottest sector of the market. Nvidia just unveiled its new compact AI superchip, the GB10, and its stock soared to a record high of $153.13 at yesterday’s open. It’s a textbook example of a meteoric rise.

But it turns out it was the classic rally on the hype of a new product. The stock quickly reversed, dropping $13.12 from peak to trough. It created an ‘outside reversal’ (circled), where the stock opened higher than previous day day, but closed much lower at $140.14 – a very bearish signal. We need to watch this carefully!

That move is very bearish and was the biggest single day pullback in NVIDIA’s history. We need to see if this is the start of a telling correction in the stock market rock star which has led the big 2024 rally.

What we are watching is to see if NIVDA breaks down below that lower rung (green diagonal line) of its wedge pattern at 135.00.  If it does, then the next Key Support sits at 127.00, so we are watching that level to see if it fails. If it does, then we could see NIVIDA have a significant correction (purple dotted line).

Secondly, we want to revisit the Head & Shoulders pattern we highlighted on January 2nd.

Back then, we noted that if the right shoulder of the S&P 500 breaks below the neckline (green dotted line), it could signal a significant correction in the markets.

This remains a key level to watch. A breakdown below the neckline (potential move highlighted by purple dotted lines)  would confirm the pattern and could set the stage for a broader market pullback. Keep an eye on this critical support level!

While there’s no guarantee either scenario will play out, if NVIDIA breaks down, it could drag the rest of the market down with it.

Stay tuned!

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“Head & Shoulders Pattern Forms – Key Market Moves Ahead This Friday”

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As of January 2, 2025, the much anticipated Santa Claus rally is failing to materialize. The S&P 500 heat map painted another grim picture, with most sectors in the red. However, Nvidia and Meta managed to post solid gains today, while the oil sector continued to show some resilience. Outside of those and a few other bright spots, the broader market remained under pressure.

Over the past few weeks, we’ve highlighted a critical technical trend we’ve been closely monitoring. On the chart below, we’ve drawn a trend line (upper yellow diagonal line) connecting the November low to the present. From November to August of this year, this trend line served as support, but in August, it failed to hold (first white arrow and circle). Since then, it has acted as a resistance level (red arrows).

Following the breakdown in August, we established a second, lower trend line by connecting the subsequent lows. This lower line has provided key support for the S&P 500 up to December 18th. However, since then, the index has struggled to re-enter the channel between these two trend lines.

Zooming into a shorter timeframe, we can clearly see the S&P 500 rallied to test the lower boundary of the uptrend channel but failed to break through (white circle). Since then, it has turned lower.

A Head & Shoulders pattern is now forming, signaling a potential bearish scenario. If the right shoulder breaks below the neckline (green horizontal line), it could trigger a more substantial decline.

To estimate the potential downside, we measure the distance from the head to the neckline and project that downward. This suggests a support target around the 5600 level.

As of today, the neckline remains intact, so there’s no confirmation of an imminent decline. Friday’s market action will be crucial—either the neckline holds, prompting a rebound, or it breaks, paving the way for lower lows with an initial target near 5600.

Stay tuned !