A Much-Needed Pullback in NIO Stock Has Arrived. Now What?

The parabolic stage of Nio’s (NYSE:NIO) epic ascent has ended. In its place, a pullback has formed. This is the first time in weeks that sellers have had a legitimate dip to buy. Let’s take a closer look at where and how you should consider deploying new NIO stock trades.

A Nio (NIO) store at night in Shanghai, China.
Source: Robert Way / Shutterstock.com

To say the stock has needed a correction is an understatement. The pace of its rocket-like rise has been incredible.

It entered June near $4 and exited November at $52. Volume ballooned along the way, signaling mass adoption by institutions and individuals. The Street’s fascination with electric vehicles and their role in the future of transportation has been a boon to Nio and the few other public companies in the industry.

It’s not a coincidence that Tesla (NASDAQ:TSLA) finally entered the prestigious S&P 500 during the same year that EV stocks went bananas.

NIO Stock Price Levels to Watch

Nio (NIO) chart with bull retracement

In early morning trading Tuesday, Nio shares were down 6.5%. The weakness stands in contrast to the Nasdaq, which is galloping higher by 1%. The weakness isn’t a broad market problem, then, but one unique to NIO. But if I’m honest, the red-hot Chinese EV company has been moving to the beat of its own drum all year long. Its detachment from today’s market run is a continuation of that fact.

When retracements like this crop up, it’s instructive to assess the overall trend to search for potential support zones. Consider these areas where buyers may emerge to halt the decline and defend the trend. One of the challenges that quickly becomes apparent with Nio stock is that there aren’t many prior pivot lows to anchor on. The ramp from $25 to $47 that we saw last month was essentially a single swing with only a few single-bar retreats to create minor support along the way.

They formed at $42.50, $40.50, and $38. Together these are the only old support zones that stand between the current price and a power plunge back toward $30. That said, there’s the obvious chance that a new floor will develop at some other threshold.

The 20-day moving average is also a popular gathering ground for dip buyers. Bargain hunters often loiter near it, waiting to buy weakness instead of chasing strength. We are testing the 20-day as I type, so there’s still a chance it holds. Even if it doesn’t, and a deeper pullback forms, I still think we’ll see a bounce sooner than later, and those who deployed bull plays into the dip will profit.

If nothing else, broader market strength and year-end seasonality should keep the bubbly sentiment alive.

Naked Puts Look Nice

We’ve seen a gradual lift in implied volatility during the drop as demand for options has risen. The reinflation of premiums makes selling puts intriguing for those willing to snap-up shares at lower prices.

In timing the entry, I definitely suggest waiting for confirmation that a pivot low has formed and NIO is on its way back up. It isn’t yet clear if the dip is done. The intraday chart remains in a downtrend, and prices are still near the low of the session.

Using December options offers a quicker profit but doesn’t allow you to go as far out-of-the-money. As such, I’m opting for using January contracts.

The Trade: Sell the January $29 puts for around $1.

Consider it a bet that prices rebound and remain above $29 by expiration. The options board is pricing in a 91% probability of profit.

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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Article printed from InvestorPlace Media, https://investorplace.com/2020/12/a-much-needed-pullback-in-nio-stock-has-arrived-now-what/.

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