Electric cars are gaining momentum around the world and as they do, EVs also gain ground on the internal combustion engine. That momentum hasn’t helped Nio (NYSE:NIO) stock, which has struggled and is now well off its IPO highs. Betting on NIO stock now carries a lot of uncertainty but there are short- and long-term ways to profit from it.
NIO operates in China, the largest market for cars and specifically electric-powered ones. Unfortunately, the hoopla around its stock quickly died on Wall Street and its never fully recovered. Sporadically, NIO stock rallied but failed to hold the greens as it sits 70% below its IPO highs.
The year-end spike to $4.87 a share was an opportunity to book the profits and wait out another dip to buy. Rallies that are this big don’t always make a great place to start new longs.
Risk Appetite is a Must
In the middle of September, writing wrote about an opportunity from Nio stock, I titled the article “Nio Stock Headed into Wild Action Soon.” That turned out to be prophetic since what ensued was a 60% drop followed by a 320% rally into the December highs.
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Tesla (NASDAQ:TSLA) did a lot of the heavy lifting for all EV makers. And its own impressive stock rally may also have added to the upside in Nio in December. So coming into this week, I intended to raise caution against chasing Nio stock much higher than the near $5 it had reached a few days ago. Ironically, it has since corrected 35% from that earnings spike high.
Nevertheless, I retain my cautionary note on Nio stock even after this correction. This is not against the company’s prospects alone, only time will tell if bulls or bears are correct long term. However the chart suggested that near $5 there was a lot of resistance. This was a huge ledge from which the stock tumbled last May.
Nio Stock Price Resistance is Normal
When a stock recovers a prior accident scene, it first tends to face resistance. The bulls can still continue the rally, but they often need to fade and shake out a few weak hands to establish a better base for their continued attempts for more upside.
So for Nio stock now, the risk becomes the existence of a gap down to $2.50 a share, where it was just days before that Dec. 30 high. But as long as the bulls can maintain the higher-low trend they started last October then they retains the trading reins. It is important to note that as wild as the recent moves have been in Nio stock, dips after sharp rallies are part of normal chart patterns. What would be abnormal is a straight shot to the moon with no breather.
So for those looking to trade Nio shorter term, the best entry would be after proof of stabilization near the base of the most-recent rally. This is near $2.40 per share. For the long term, the viable thesis to own NIO stock still exists. This is regardless of these short-term blips in price.
Nio Needs to take its Piece of the EV Pie
Tesla proved that the world is ready for the electric vehicles. So now it’s up to all the other players to carve up a slice of it for themselves. Nio is one of them, so there’s no reason why they shouldn’t be successful in the long run.
However, the recent debacle in the stock that took it down almost to $1 per share in early October should serve as a reminder to everyone that there are no sure things … stocks do sometimes actually go to zero. Meaning it is risky to “average down” in speculative stocks like this. Just ask those who did it with Pets.com or WebVan.
Meanwhile, and for the shorter term, Nio stock makes for an excellent trading vehicle as long as the investors know how to read the charts to gain an edge. This is regardless of the long-term conviction levels in it.
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.
