Broadcom (NASDAQ: AVGO) stock price has entered a deep correction zone as the recent rally faded. It has collapsed by over 15% from its highest point this year and is hovering at its lowest level since February this year. 

There are three main reasons why the AVGO share price has entered a correction phase – defined as a 10% drop from a recent high. 

First, the crash is in line with other companies in the artificial intelligence (AI) and semiconductor industries as demand fizzles. Nvidia shares crashed by over 10% on Friday and are down by over 22% from the highest level this year.

Other high-flying companies like Arm Holdings, Super Micro Computer, and Intel have all plunged hard in the past few weeks. There are fears that the AI bubble is bursting as we have seen in the electric vehicle industry.

Second, Broadcom’s shares have retreated because of the actions by the Federal Reserve, which have killed the animal spirits in the financial market. Estimates are that the Fed will not cut interest rates in June since inflation has been quite high. 

Some economists believe that the Fed will even hike interest rates later this year, possibly after the November election. Technology companies tend to do well when there are signs that the Fed will cut interest rates. Indeed, the tech-heavy Nasdaq 100 index has plunged by over 7.6% from its highest point this year.

Internally, Broadcom has been going through some changes that may affect its reputation among VMware customers. In a blog post last week, Hock Tan, the head of Broadcom unveiled a series of measures to simplify its pricing strategy. 

He said that VMware pricing will move into a subscription model that he believes will solve some of the key challenges that customers face. The company will also offer standardized pricing across all cloud providers and standardize the technology stack. 

However, not all customers have welcomed the move, citing the irregular pricing adjustments from the company. In a statement, CISPE, a leading lobby in the tech industry said:

“What threatens the economic viability of many cloud services used by customers in Europe, are the massive and unjustifiable hikes in prices, the re-bundling of products, altered basis of billing and the imposition of unfair software licensing terms that restrict choice and lock-in customers and partners.”

Broadcom has become one of the most active acquirers in the technology industry. It paid $69 billion for VMware and $10.7 billion for Symantec. Other acquisitions were CA Technologies and Dario Allegro MicroSystems.

These acquisitions have turned Broadcom into one of the biggest company in the world with a market cap of over $558 billion.

AVGO chart by TradingView

The daily chart shows that the AVGO share price topped at around $1,400 level, where it formed a double-top pattern. It has now retreated to the neckline of this pattern at $1,197, its lowest point on March 19th.

The stock has dropped below the 50-day moving average and is now at the neckline of the double-top and at the 100-day moving average. It has also dropped to the bottom of the trading range of the Murrey Math Lines tool.

Therefore, a drop below the 100-day MA will signal that bears have prevailed and push it lower. If this happens, it could drop to the strong pivot and reverse point at $1,130. The stop-loss of this price action will be at $1,260.

In the long-term, however, the stock will likely bounce back and possibly retest the YTD high of $1,410.

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