The wicked volatility that has made Nikola (NASDAQ:NKLA) stock a mainstay among speculation junkies was taken up a notch recently. Or more like 10 notches! After soaring 54% on its highest volume session in history, the company shares promptly imploded. Friday’s 14% whack brought its total three-day loss to -36%. What a dumpster fire.
So what’s all the fuss about? What caused the explosion turned implosion, and what are the implications for the stock moving forward? After laying out the narrative, we’ll break down which price levels bear watching and whether you should stick your neck out and play, or embrace the safety of the sidelines.
On a side note, if you somehow stumbled into Nikola before this week, unaware of its penchant for nasty volatility, well, you know now! It’s a widowmaker stock that requires both small and smart position sizing — and intestinal fortitude of the highest order.
The News Ricochet
Bulls came out of the gate early last week, bidding NKLA stock to the moon after General Motors (NYSE:GM) announced it was buying 11% of Nikola and that the company would be manufacturing GM’s electric pickup truck, the Badger. Closing a partnership of this magnitude is a big deal. The Street responded with a flurry of buy orders. Nearly 135 million shares traded hands on the session, marking the most active session on record. Nikola’s place as a key player in the electric vehicle space was seemingly cemented.
And then, not two days later, all hell broke loose.
Hindenberg Research unleashed a brutal short-seller report accusing Nikola and its CEO, Trevor Milton, of fraud. The firm, which is short shares of NKLA, alleged the company used deceptive practices and that Mr. Milton made several false statements. Citron Research threw its hat in the ring via a tweet on Friday, saying Hindenburg exposed “what appears to be a total fraud with $NKLA.”
Nikola issued a press release to refute the allegations. Nevertheless, doubt rained down on its stock price.
Nikola Stock Chart Spells Trouble
To chronicle the rise and fall from grace, let’s use the weekly time frame. The first item that jumps off the screen is the incredible volume surge. In total, over 274 million shares changed hands Tuesday in the last four trading sessions. The groundswell in participation dwarfs anything that came before and illustrates just how much emotion was on display. The monster bearish engulfing candle we’re left isn’t the largest weekly range we’ve seen, but it’s close.
We’re now officially below the 20-week moving average. It’s the second consecutive weekly close below the line in the sand and reinforces that sellers are in control of the short-term trend. I suspect the current candle will hang over the stock for weeks to come. I’m anchoring on the prior pivot high of $48. That’s the level that needs to be taken out before the weekly trend turns bullish again.
Until then, it’s the sellers’ game to lose.
Tuesday’s launch turned into an epic fakeout. Anyone who purchased after the General Motors news was sucked into the ultimate trap. The plunge that carried NKLA into the weekend pulled prices well below the 50-day and 20-day moving averages. There is some potential support near $29, so consider it your first target. After that, the 200-day comes into play at $25.
At its current perch, I have Nikola stock in my “too hard” bucket. Its movements will continue to be news-driven, and overnight gaps are likely here to stay for a spell. The trend is way too bearish for comfort, but it has already dropped so far that new bear trades are ill-advised. It’s hard to know whether a bounce like today’s is a short-term thing or a sign of a new trend.
The best trade is no trade. Keep your powder dry and wait for the smoke to clear before playing.
On the date of publication, Tyler Craig did not have (either directly or indirectly) any positions in the securities mentioned in this article.
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