Let’s get the bad news out of the way first. The trend in Nokia (NYSE:NOK) stock is awful. It is now back to its levels from 1997 — incredibly far from its dot-com high of $62. In all fairness, a lot has happened since then, so it’s important to watch this trend.
And the trend in question shows potential upside even after the recent rally.
OK, now it’s time for the good news. After the market’s hideous reaction to Nokia’s October earnings, NOK stock rallied 25% off the bottom. But now it’s back into a pivotal zone that dates back to November 2016. If you don’t remember, it was during that time period when the stock rallied 65% in the aftermath of President Donald Trump’s election.
From a technical perspective, as Nokia stock returns to this zone, it will face resistance. The good news is that the earnings drop left a giant open gap that it’s now trying to fill up to $5 per share.
NOK Stock Has Support and Opportunity
Management is trying to convince Wall Street that the company has good prospects. Nokia recently trimmed jobs in some areas to concentrate more on 5G. So on the face of the matter, it is trying to be in the right spot for at least the next two years. And investors have lately been giving NOK stock the benefit of the doubt.
So if I’m long the stock I can wait to see the outcome of this technical struggle. The challenge is that the whole stock market is at all-time highs, so if the S&P 500 corrects, it will drag NOK stock down with it.
Fundamentally, there are few experts in the field anymore as changes are coming at a blinding pace. Nokia sells at a low price-to-sales multiple, so from that perspective there’s not a lot of risk behind owning the shares at current levels. Nevertheless, a broken chart like this sometimes is a sign of a broken company. We might find out that Nokia is actually broken.
But we shouldn’t judge based on that. For now, it is best to use the charts for clues. I noted the resistance above, but the technicals also suggest that there is support below near $4 per share. So the bulls can withstand small dips to continue the recovery rally.
Changes Should Come Soon
Earnings are coming soon, and judging by the reactions to prior reports, this is going to be binary risk. Leading up to the results, investors should be humble in their convictions on NOK stock. There is no way to predict how the markets will react to the next earnings report. In the short term, it is a complete guess, regardless of how good or bad the actual numbers are. It is all about expectations, and Wall Street is very unpredictable that way. There is a history of great reports triggering 20% selloffs, and horrendous ones spurring rallies.
So to be on the safe side, it is best to lock in some profits just in case. It’s not often that we get a 25% return in under a month and regardless of the outlook on NOK stock, discipline requires us to actually cash some shares in.
The consensus on Wall Street is predominantly bullish these days and this makes me nervous. I was bullish all of last year, so now that everybody is bullish it’s my turn to worry. I believe that caution here is the best course of action.
So let’s end this on a good note. While NOK stock is not likely to recover all its old glory of the dot-com era, it has more technical upside here as long as management does its job.
Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. Join his live chat room for free here.
