If you didn’t already have Nio (NYSE:NIO) stock on your radar, I bet you do now.
The Chinese electric vehicle maker just topped off a two-day run that added 36% to its share price. Believe it or not, NIO stock is up approximately 20-fold since sitting a lowly $1 last October.
Print out that chart and stick it on your fridge. It’s worth gawking at. Today we are investigating what started the buying binge and how you should position yourself now.
That Was One Powerful Upgrade
Typically, analyst ratings are not that special or unique. Sometimes, you’ll see an upgrade or downgrade that raises an eyebrow or catches traders’ attention for a day, but in the long run, they’re just part of the background noise surrounding each session. But every once in a while, you’ll see a rating shift strike a chord with investors. Like a spark to gasoline, it starts something.
Nio’s epic surge this week is a perfect example. The bonanza started after UBS analyst Paul Gong changed his rating to “neutral” from “sell,” raising his price target from $1 to $16.30. As is almost always the case, I suspect the market forced Gong’s hand. No matter how pessimistic your outlook or grim the company’s fundamentals, it’s almost impossible to keep such a low target in place when the stock price is 15x higher.
Traders were quick to celebrate the news, and jammed NIO up nearly 20% on Tuesday. Other analysts were quick to follow. On Wednesday, Morgan Stanley analyst Tim Hsiao released a memo to clients upgrading NIO from “equal weight” to “overweight.” He also raised his price target from $12 to $20.50. As is customary for analysts, Hsiao cited a variety of fundamental improvements as reasons for the upgrade.
Citibank also got in on the action by reiterating its “neutral” rating but lifting its target to $18.10 from $16.
I don’t think you needed to know all the details of the upgrades to participate in the party, though. Anyone with half a brain and eyesight could have seen the bullish movements in Nio’s stock chart before this week’s run-up. Whether you had positions ahead of time to capitalize is a separate question, but there’s no denying NIO stock was heating up.
NIO Stock Chart
To grasp the bigger picture, it is worth a glance at the weekly chart. One of the best tells I know of for IPO stocks is to shift aggressively bullish when they finally break above their post-IPO range.
Nio came public in September 2018. Shares started trading at $6, and within a day, had hit a post-IPO high at $13.80. That high held up for a long time, but things have been heating up for NIO stock.
Time and again, this development sparks a prolonged run to the upside. I don’t think it is a coincidence that the bullish behavior has persisted since July’s surge pushed NIO to record highs.
There is no denying the stock is hilariously overbought, but avoid the temptation to pick the top. Momentum has been unleashed. The daily time frame shows just how constructive the trend was before this blastoff. Over the past six weeks, an ascending triangle pattern formed as prices digested June’s moonshot. Volume patterns were healthy during the consolidation, with very few distribution days developing.
The Bottom Line
The two-day rally that carried prices into Tuesday all but yelled that a breakout was imminent. For spectators wondering if they should deploy new trades, I’d suggest caution. The risk-reward is poor, and the odds favor a pause or pullback developing. After that, though, it’s game on. Even if you’re a bull, you should want a breather anyway. The speed of the ascent is unsustainable and if we don’t get a correction now, it could set up a nastier one down the road.
I’m using the last two large rallies in early June and July as templates. Both corrected before moving higher. My bet is this one plays out similarly. If you must buy now, then at least scale-in. Enter a partial position, so you have the flexibility of adding more at lower prices.
For a free trial to the best trading community on the planet and Tyler’s current home, click here! At the time of this writing, Tyler held long positions in NIO.