Luckin Coffee (NASDAQ:LK) suffered a sharp drop alongside a slew of other Chinese equities in recent days. But is LK stock’s overall uptrend in jeopardy? And are fears of coronavirus enough to upend what has been one of the best performing momentum stocks on the Street?
First off, who knew a coffee stock could be so exciting? Luckin Coffee was volatile from the get-go (the initial public offering was just last May), but the party didn’t really start until November’s earnings announcement lit a fire under LK stock. Since then, shares of the China-based coffee shop chain have nearly tripled in value.
Momentum traders and volatility junkies alike have been gushing about Luckin for awhile. I’ve seen the affection on my Twitter feed, but don’t believe the love is justified. On the contrary, the stock has been exceptionally well-behaved given such a high volatility reading. Indeed, clean breakout and retracement patterns litter the uptrend and have offered numerous opportunities for swing traders and tactical speculators to capitalize on the excitement.
But with last week’s whack creating the most significant dip we’ve seen in the entire uptrend, it’s worth pondering if the future won’t be as profitable as the past.
LK Stock Chart
The 50-day and 20-day moving averages provide guideposts for gaming Luckin’s trend. These smoothing mechanisms help to clarify trend direction and declutter otherwise messy price action. Both have been pushing firmly higher over the past quarter to confirm short- and intermediate-term uptrends in LK stock. While all previous pullbacks and pauses after November’s godsend of an earnings report found buyers at the 20-day, last week’s retreat broke below it. And that marks a big enough change in character to warrant some caution moving forward.
That said, we haven’t yet broken any primary horizontal support levels or prior pivot lows, so the overall uptrend is still intact. What we often see when minor floors like the 20-day are breached is choppier price action and less well-behaved trending. So don’t be surprised if LK remains under pressure for a bit before buyers regain control.
I like to use the 20-day as my line in the sand. Until we climb back above it (it’s around the $42 level right now), bulls should pull in their horns.
As for the ultimate impact of the coronavirus crisis on Chinese equities like Luckin Coffee, let’s just say no one knows how that mystery will unfold. This is where being a technician and price follower simplifies matters; there’s no need to become a virologist. Just let the price of LK stock tell you when buyers are returning. For now, the $42 zone or 20-day moving average is the level that needs to be cleared.
Until then, or until we see a different bullish pattern develop, I suggest caution.
As of this writing, Tyler Craig didn’t hold a position in any of the aforementioned securities. For a free trial to the best trading community on the planet and Tyler’s current home, click here!