Following an abrupt crash last week, Nio (NYSE:NIO) shares are in a more sustainable position to produce some green growth in investors accounts. That said, let’s see what’s happening off and on the price chart, then offer a risk-adjusted means to parking capital in Nio stock aligned with those findings.
No doubt it was a tough week to be long Nio shares. The Shanghai-based luxury electric vehicle (EV) manufacturer saw a 20% haircut to the stock’s valuation for the five-day period. However, Nio was not alone. There was plenty of similar and even more miserable price action within the EV market that NIO stock investors could commiserate with.
Electrameccanica (NASDAQ:SOLO). Kandi Technologies (NASDAQ:KNDI). Nikola (NASDAQ:NKLA). Workhorse (NASDAQ:WKHS). With the exception of EV kingpin Tesla (NASDAQ:TSLA), the high-flying electric vehicle group saw dramatic price disruptions upwards of 50%. And there were plenty of places to point blameful fingers at. Undesirable secondary’s. A pair of fresh short-seller warnings. One alarmingly compromised General Motors (NYSE:GM) partnership and news of a delayed $6 billion USPS EV fleet upgrade were ample incentive for investors to pull the plug on EV stocks, including Nio, as part of a larger and obviously worried, sympathy reaction.
However, the good news is while Nio was taken along for the ride, it’s only offense was a speeding ticket of sorts on the price chart. The overbought stock was up 65% in November, and is up more than 1,000% on the year. Enough said, right? Actually, no.
The EV group’s extreme downward and bearish shift in investor sentiment actually ignored solid monthly deliveries data from Nio early in the trading week. The company more than doubled its November deliveries year-over-year. Monthly deliveries approached 5,300, which were helped in part by Nio’s well-received EC6 sport crossover launched a couple months ago.
To be fair, a bullish call out of Goldman Sachs helped cut down Nio’s worst losses. A raise from “sell” to “neutral” and an impressive price target hike to an above-the-market $59 added 6% in Wednesday’s session. Also, this move to $59 would be roughly 3% above Nio’s late-November all-time-high. And it also allowed shares to reverse aggressively higher by 25% from an intraday low of $38.43.
Analysts at the investment outfit admit to “underestimating the benefits to NIO from powertrain breakthroughs, the introduction of its battery as a service program, and regulatory incentives that turned around electric vehicle market demand from an ongoing decline.” Better late than never, right?
Nio Stock Weekly Price Chart
Corrective losses of up to 30% are common in growth and thematic stocks after big run-ups. And healthy markets where the major averages continue to make new highs are no exception. Investors in Nio stock certainly learned that reality the past several sessions. Up until two weeks ago, Tesla was confirming this very fact before the stock broke out of a much needed and healthy-looking basing pattern of nearly three months in duration.
The good news and as with Tesla, with today’s short-term pain in Nio, the diffusing of over-the-top bullish animal spirits and in-hand 33% price correction can lay down the foundation for a base to form and eventual new highs.
Prudently and not unlike a calling a top in momentum stock that’s still trending strongly, calling a bottom too quickly can be for foolhardy for a stock of Nio’s caliber. I wrote as much in mid-November warning investors overconfidence in shares wasn’t far removed from ending badly. Now, and similarly, the message is to look at shares as attractively discounted to price levels which typically make sense for starting a position with room to add to the position if Nio stock hits markedly lower levels.
As for actual positioning, given that shares have traded in an area known to hold longer-term value, but no indications of a confirmed bottom on the weekly chart, let alone the longer-term monthly view, I’d suggest a February $40/$60 collar strategy as a way to gain exposure to shares.
If a bottom in Nio is in place, this limited and reduced risk position can profit from a rally and be used to trade the trend over time using adjustments. Overall, though, if a fairly decisive trendline failure and weak-looking stochastics have any say in matters and shares continue crashing, this position will put investors in a much stronger position financially and mentally to act professionally and likely profitably, rather than playing the part of a crash test dummy.
On the date of publication, Chris Tyler held, directly or indirectly, positions in Nio (NIO), Electrameccanica (SOLO) and their 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.