Nio (NASDAQ:NIO) shares have been scorching higher, up more than 50% in five trading days. From the lows in October, Nio stock is up more than 220%.
This type of price action would cause many investors to assume that they missed their chance to buy. But because Nio stock price is still under $5, many feel that that may not be the case after all.
The entire move started with earnings and a shift away from bankruptcy. If Nio stock can build on its recent momentum, then perhaps the stock can continue higher.
Here’s What Nio Must Do Now
Nio stock was one of the few companies to report earnings between Christmas and New Years. The China-based electric vehicle maker didn’t disappoint, delivering a top- and bottom-line beat.
Even though the company still has issues — like negative gross margins and thus, no profitability — it has momentum back on its side. At the high of day on its post-earnings surge, shares were higher by 100%, a double in a single session. However, shares finished higher by “just” 53% that day.
Still, it was clear that Wall Street liked the results. Now Nio has just two jobs, and this is all that really matters. It needs to maintain delivery and production momentum and it can’t run out of money.
For electric vehicle makers — throat clear: Tesla (NASDAQ:TSLA) — investors have already shown a proven interest in this group if the deliveries are there. Essentially, prove that there’s demand, and investors will back it. That of course, comes with the caveat that the company won’t run out of money.
Tesla’s stock was able to hang in there for years, trading between $250 and $350 as profits came and went. But as soon as investors felt that liquidity was an issue, Tesla shares were hammered until the company took action and raised more capital. Now it’s at an all-time high.
If Nio can turn its gross margins positive and shore up its cash flow situation, while boosting deliveries, Nio stock will likely have more upside.
Trading Nio Stock
Nio stock still sports a short interest of 29%, meaning that subsequent rallies could trigger short squeezes higher. However, bulls need to maintain control for that to happen.
I acknowledge that the charts are a little crowded, but it provides a roadmap for Nio stock price. Before the company’s better-than-expected earnings results, Nio was already trading better. Shares were riding uptrend support higher (blue line), were above the 20-day and 50-day moving averages and had shown signs of penetrating the $2.50 level.
With the gap-up, it reclaimed the 200-day moving average and 50-week moving average, the latter of which is currently at $3.77, roughly at last week’s closing price.
Remember, bulls now need to maintain control. They do that by keeping the stock over some of these key measures. The more gains the stock can hold, the better. If it loses the 50-week moving average, it puts the 200-day moving average on the table. Below that puts a key zone on the table though.
That zone is the backside of prior wedge resistance (green line), the 20-day moving average, uptrend support and ultimately, the $2.50 mark.
If Nio stock can maintain above $3 though — and better, $3.50 — then it puts the top of the recent trading range on the table. That’s $4.25. Over the top of the recent range puts $4.87 on the table. That’s if Nio stock bulls can maintain momentum. Over $4.87 puts $5-plus on the table.
Bottom Line on Nio Stock
China is a massive country, with a population of more than 1.38 billion people. That’s more than four times the size of the U.S. population. Let’s put it this way: If you combined Europe, the U.S., Canada and Brazil, China would still have 75 million more people.
China’s also the world’s largest electric vehicle market. So if Nio can’t gain traction in this market, it likely can’t gain traction anywhere. At this moment, it has traction and the charts reflect it.
The stock’s price action has shifted from incredibly bearish to noticeably bullish. That can change, obviously, but if management can improve the financials like they say they want to, and if the company can maintain production momentum, then the shorts may struggle with this one until the technicals start to show weakness.