Nio (NYSE:NIO) is considered to be a pioneer and was one of the first players in the Chinese electric vehicle market. The company says that its mission is to shape a “joyful lifestyle” by offering premium smart electric vehicles to its customers. Nio reported earnings on Monday and needless to say, shareholders were probably not very joyful. As a result of the release, the NIO stock price dropped by almost 20%.
And in what I believe is probably a sign that things are worse than they appear, the company actually cancelled the conference call. This is highly unusual — and in my opinion shows a lack of integrity in the company’s management. This makes them seem like cowards. They have a moral obligation to shareholders to explain why they are losing money and what they intend to do about it.
Let’s not forget, shareholders are not just wealthy hedge-fund millionaires. Many pension plans are investors as well, so this is also hurting hardworking teachers and blue-collar workers that are trying to save for their retirements.
The company blamed its problems largely on the trade war. For the second quarter, Nio reported a loss of $478 million. This is about 80% larger than the loss that it had in the same quarter last year. Gross margins were a dismal negative 33%. The company also announced that it would be cutting about 20% of its workforce.
What Is Next for Nio Stock?
I wouldn’t personally invest in Nio, but here’s what you need to know if you are interested. NIO stock recently ran into resistance around the $3.25 level. This level was resistance at the end of August as well. If the stock does eventually rally back to this level, it will probably become resistance again.
If it continues to drop there is a good chance that it will find some support around the $2.50 level, although considering management’s cowardice, I wouldn’t be surprised if it drops much further. This level was important support last June. It is also where the low was in early September.
Levels that were support have a tendency to become support again. This is because the investors who wanted to buy the stock and missed it promise themselves that this time they won’t. They make a commitment to buy it. The investors who shorted it at the support level are losing money when it moves higher. They tell themselves that if the stock drops back to the support level, they will cover their positions, get out and break even.
An important dynamic to understand about markets is that bottoms are typically more volatile than tops, so it is much harder to predict the exact bottom. This is because bottoms are caused by the sellers driving the markets and tops are caused by buyers driving the markets. Selling is due to fear, and buying is due to hope.
Fear is a more powerful emotion, so this results in more volatile trading when markets are forming bottoms.
At the time of this writing Mark Putrino did not hold any positions in the aforementioned securities.