Shares of electric vehicle manufacturer Nio (NYSE:NIO) tanked after an attention-grabbing announcement. But is Nio stock really an investment to steer clear of? Let’s see what is happening off and on the price chart and what a risk-adjusted opportunity for the road ahead might look like for today’s investors.
Led by the tech-heavy Nasdaq Composite, the market is eking out yet another all-time high. But on Monday morning, Nio began moving in reverse.
Last week NIO surged 33% in back-to-back sessions to an all-time high of $20.97. The move was fueled in part from a surrender by a longtime bear at UBS. Analyst Paul Gong lifted the firm’s “sell” rating to “hold” while raising Nio’s price target from $1 to $16.
Improving fundamentals, global investor interest in the EV story and an economic recovery in China were cited as reasons behind the bullish revision. But Nio’s fierce rally proved short-lived. A report of a pending secondary offering led investors to modest profit-taking.
All About the Secondary Offering
Shares of Nio were down by as much as 9% in the opening minutes of trading after the company announced its pricing of 88.5 million shares at $17. Proceeds of the sale will go toward autonomous driving research, global market development, increasing ownership in NIO China and toward general corporate expenses.
While the sale and its proposed uses are far from unusual, the resulting decline in shareholder value has been anything but simple for investors. An intraday low of $16.82 undercut the proposed filing price by just over 1%. But by the end of the day, Nio stock had climbed back above $19.
By some standards, the corrective low is just a whisker from the 20% threshold defining a bear market. That could be cause for some concern. But by other measures laid out on the price chart, it is time to back up the truck.
Nio Stock Weekly Chart
Is the price pressure on Nio stock an opportunity to hop on board for a discount? I think so. The dip to $16.82 on Monday is a good sign that shares have bottomed.
Stocks correct all the time. Even in the healthiest investing environments, a decline of up to 30% for a growth stock like NIO is common. That’s particularly true after a big run-up in share price. And Nio’s rally of around 950% since its March bottom certainly plays into that idea.
More recently, gains of more than 100% since early July reinforce reasons to remain positive during the corrective price action rather than fear a top is in place. There’s more bullish evidence too.
As the provided weekly chart of Nio reveals, Monday’s corrective low has successfully tested the 38% retracement level tied to the stock’s July low. Shares also found support just above its July high formed after a massive saucer-shaped breakout. What’s more, stochastics is positioned in neutral territory and is bullishly aligned after a recent crossover.
How to Trade Nio
What’s next for Nio? There are no guarantees of course. But given the overall bullish situation, a reassertion of price momentum could reasonably send the stock toward $30 by early next year. That forecast is based on an eyeballed measured move out of the large base.
For like-minded investors who want to ride NIO’s bullish trend with a stronger risk-adjusted profile, I’d recommend buying a collar. This strategy limits and reduces risk to a defined dollar amount and can be restructured over time to take advantage of both rising and falling prices. One favored combination is the October $16 put / $26 call for about 10 cents over a standalone Nio stock position.
Investment accounts under management by Chris Tyler currently own positions in NIO and its derivatives but no other securities mentioned in this article.
Chris Tyler is a former floor-based, derivatives market maker on the American and Pacific exchanges. The information offered is based on his professional experience but strictly intended for educational purposes only. Any use of this information is 100% the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT and StockTwits.