Nio Stock Is Worth ‘Test Driving’ If You Can Stomach the Risk

It has been more of a train wreck than a car crash for investors in Nio (NYSE:NIO). But without putting the damage completely in the rear-view mirror, it’s time for contrarians to consider a test drive in Nio stock.

Nio Stock Is Worth 'Test Driving' If You Can Stomach the Risk
Source: Shutterstock

Nio stock has been called the “Tesla (NASDAQ:TSLA) of China” by more than a few investors since its IPO last year. Whether the comparison is supposed to be a compliment, a warning or both, is probably up for debate.

What is known is since the Shanghai-based electric vehicle outfit went public last September, steering clear of NIO would have been a very good decision. As of last week, shares hit an all-time-low of $2.35 and world’s removed from it’s all-time-high of $13.80 and IPO pricing of $6.25 a share.

Behind the punishing action in Nio stock, demand for the EV upstart’s Tesla-like SUV has been a problem. Whether sales have been a casualty of the trade war, reduced subsidies, an auto boom in China showing its age, stiff competition in the upscale EV space or all the above is another arguable point.

The other matter is conditions could still get worse for NIO. Aside from spiraling losses and cratering sales, with negative vehicle gross margins in three of the last four quarters, financing of any type, if needed down the road, is going to be problematic at best.

Maybe worse, as InvestorPlace’s Will Ashworth pointed out recently, Nio stock’s Altman Z-Score, an indicator of bankruptcy, is grim. He surmises the company could face financial distress in the next one to two years if Nio doesn’t miraculously get its you-know-what together.

The good news is no single indicator is perfect. Additionally, even if this particular signal played out as an obituary for Nio stock, it’s not going to happen anytime soon. The better news for the Nio stock price in today’s market is a U-turn on the price chart is taking shape and indicating a test drive may be in order.

Nio Stock Weekly Chart

NIO stock chart
Click to Enlarge
Source: Charts by TradingView

The weekly chart of Nio stock shows a mildly bullish engulfing candlestick formed last week. The pattern’s range spans an all-time-low of $2.35 to a high of $3.05. With shares backing away to finish at $2.64 on Friday and finishing flat in Monday’s session, obviously sentiment is still weak in NIO. But that’s okay.

An oversold stochastics showing a bit of positive divergence and a short ratio in excess of five days raises the odds for a profitable bullish reversal to unfold. Let’s be clear though, this is a shorter-term, long position for contrarian investors comfortable with a more speculative and volatile play like Nio stock.

My suggestion is to wait for shares of Nio to move past the prior candle’s high of $3.05 and simply buy the stock. If shares do follow through, $3.75 – $4.25 is an area where profits should be taken and the position aggressively trimmed.

On the downside, given the engulfing candle’s all-time-low of $2.35, exiting beneath that critical level seems excessive in more than one way. I’d recommend a stop-loss beneath $2.80. That’s the low of NIO’s topping candle on the daily chart from last Thursday. And in conjunction with risk of less than 9% and our reward expectations, that certainly looks good from more than one angle.

Disclosure: Investment accounts under Christopher Tyler’s management do not currently own positions in any securities mentioned in this article. The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional options-based strategies, related musings or to ask a question, you can find and follow Chris on Twitter @Options_CAT and StockTwits.

Article printed from InvestorPlace Media,

©2021 InvestorPlace Media, LLC