After last October’s earnings report, Nio (NYSE:NIO) stock rallied 380% from its lows near $1 per share. Maybe some of this rally was a move in sympathy with Tesla’s (NASDAQ:TSLA) insane rip. But despite the gains, the stock is still 70% below its IPO price, so Nio is nowhere close to its prior glory.
Nevertheless, Nio stock found new life for now. Today we will examine if there is indeed a viable thesis to initiate a purchase of new shares here.
First and foremost, it is important to determine the time frame of said investment in Nio. If your goal is to own the shares as a bet on the global domination of electric vehicles, then it’s futile to try and snipe the perfect entry point. Those investors should just own it and not look at its short-term gyrations.
However, it is human nature to want a new stock position to do well. This is why people strive to find appropriate entry points.
Nio Stock Is Not Cheap
From a valuation perspective, Nio is expensive. But since this is a growth stock, it’s important to note that it only sells at 1.8 times its sales. By that measure it’s reasonable. So the next step in finding a good entry point is to look for clues from the chart.
The most recent support is just above $3 per share. So those long the stock can take a little comfort from this — there’s no reason to panic on red days. Nio stock fell almost 3% late last week, but the bulls will be harder to shake out if they know support is below.
As for the opportunity above, there are few upside catalysts lurking. The main one is near $4.50 followed by another one about a dollar higher. Both of these are resistance zones first. So as the stock approaches them it will lose steam, but these levels will quickly turn into a bullish trigger if the bulls are able to overcome the resistance.
This is where investors sometimes have to wear small trading hats. The concept is simple, because as a stock approaches prior failure points, it will encounter sellers. This means that prior failure points are not ideal places to start a new position. In this case the short-term support for Nio is close below at $3.50.
Therefore someone who wants to initiate a new position here for a long-term perspective should feel comfortable doing so. But if this line is lost, it could cause a small dip toward the prior bounce level at $3 per share. At that prior bounce level it could perhaps fill the gap down to $2.50 per share.
Bottom Line on Nio Stock: The Buyers Are in Charge
The relative strength of the stock shows that the buyers may still be in charge. The ascending trend is intact from last year, and it is making higher lows but also lower highs, so now it is coming to a point. This consolidation gathers energy, so there should be a move coming.
Here is where investor time frame becomes very important. Short-term gyrations in the stock shouldn’t change the overall thesis, but they can be scary. If your bet is that electric will be the winning way to propel cars in the future, then Nio will be a well-established provider for those vehicles.
In that case, the stock is a must-own even through the bad days.
Everything is better in moderation, even when investing. Taking full-sized positions at once is reckless as that leaves no room for managing them on dips. It’s always smart to not have absolute conviction and to be humble.
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.
