Relative Strength Shows Why the Bulls Are Right About Nikola Stock

One of the oldest investing adages is to buy low and sell high. That’s because of stories like the one currently unfurling with Nikola (NASDAQ:NKLA).

Nikola Stock: Image on phone screen
Source: Stephanie L Sanchez / Shutterstock.com

Nikola stock is successful already, but this is even before the company has made any sales. That means there is a lot more potential left to unlock over the years. NKLA stock is up 380% year-to-date despite an incredibly very tumultuous stock market.

In fact, Wall Street has become so disjointed that Apple (NASDAQ:AAPL) can fall 7% while the NKLA speculative bet rallies 40%. Not even a 21% drop in Tesla (NASDAQ:TSLA) could dent the bullish resolve Nikola showed on Tuesday and Wednesday.

The bulls often show their true colors on tough days and the NKLA bears are in deep trouble. This is a stock to own for the long term potential. That was my message back in late July when it seemed to be falling out of control. Those who took that trade would be celebrating a rally of more than 80% today.

The concept hasn’t changed even if the stock levels have. So as NKLA rallies into $55 per share, I’d rather wait for a pullback. In fact yesterday’s candle established new catalyst range limits, as you can see on the chart. Nothing against the company itself but $55 has served as a major accident scene in the past, so it’s likely to be serious resistance now. Those who are long the shares for an investment can stay long as the company works on bursting through.

Nikola Stock Is Shining During Trying Times

Nikola (NKLA) Stock Chart Showing the Trading Range from $39.91 to $52.20
Source: Charts by TradingView

Market corrections sometimes uncover overlooked winners. Earlier this week on Tuesday, when the stock market was falling precipitously, there were a few bright spots and Nikola was the brightest.

NKLA rallied up 40% on headlines that it teamed up with General Motors (NYSE:GM). This is yet another deal with a global car manufacturer that solidifies Nikola as a potential powerhouse in alternative vehicle sales. It’s no Tesla yet, but it’s going to be a big deal soon enough.

Nevertheless, from a trading perspective I would wait a little while to let the market absorb this massive rally. Chasing after a stock that moved up 40% in mere hours tends to be dangerous.

My caution here is strictly technical and addresses NKLA price action, not the company’s prospects. And therein lies the difference between investing and trading.

Those who are believers in Nikola for the long-term don’t have to worry about these short-term action comments. But active traders should heed the resistance zone ahead. I’m no hater, as evidenced by my prior bullish write up, but Nikola has since delivered a massive rally. It’s okay to ring the register, especially given that this is not a call to short NKLA stock.

Betting Against it Is a Risky Proposition

Shorting momentum stocks like these is extremely dangerous; just ask those who tried it with Tesla. Therefore it is best to buy dips and leverage the love of these stocks’ hardcore fans. In fact, I’d say I believe in Nikola stock fans even more than I believe in the company itself. That might sound unappealing, but when one considers Tesla’s fundamentals and valuation, the power of a devoted fanbase becomes hard to ignore.

The thesis for Nikola is still developing, as the company, for all intents and purposes, is still pre-revenue. Management has attracted global commitments totalin in the billions and at least one recent $1 billion order besides. Company representatives project confidence, which is probably why they have earned the trust of so many so fast.

The propensity for NKLA stock is to migrate up, not collapse. This is the type of stock that can have a very long run rate before facing real resistance, just like TSLA. When the concept is murky, the critics don’t have specific things they can attack. They can criticize one aspect or another but they can’t shoot down the idea wholesale so early in the process. This was the same problem bears had trying to short the initial spikes in vaccine companies such as Novavax (NYSE:NVAX).

There Is Room for Many Winners

The electric vehicle is making a great run at challenging fossil fuel engines. The momentum looks too great to ignore this time around after so many failures before.

Nikola is adding a new twist to it with its gas hybrid approach. This alone makes it an interesting proposition and separates it from the rest of the EV stocks and SPACs.

There is a tremendous wave of competition coming but there is plenty of room for all of them to thrive. The imbalance between electric and ICE vehicles is massive and EVs have  room to run before saturation risks.

On the date of publication, Nicolas Chahine did not have (either directly or indirectly) any positions in the securities mentioned in this article. 

Nicolas Chahine is the managing director of SellSpreads.com.


Article printed from InvestorPlace Media, https://investorplace.com/2020/09/relative-strength-shows-why-the-bulls-are-right-about-nikola-stock/.

©2020 InvestorPlace Media, LLC