Workhorse Group (NASDAQ:WKHS) stock is seeing its price behavior change. It was bound to happen eventually. Such is the fate of all rockets that finally run out of gas.
They drift. Some ultimately tumble back to earth. Others find new sources of fuel and rise anew.
Time will tell which path WKHS stock follows, but until we get resolution one way or the other, I’d steer clear.
I’ll give you two reasons why. Then, I’ll share what would have to happen to get me interested in deploying bullish trades again.
2 Reasons for Pessimism
The first and arguably most important reason for turning my back on buyers is the nasty, no-good price action of late. Though volatility has remained elevated and Workhorse has persisted as a popular electric vehicle stock, its once-powerful uptrend has turned. It’s not outright bearish – not yet at least, but it’s no longer bullish. So says the crisscrossing moving averages and meandering 50-day.
Participants, it appears, can’t make up their minds. With momentum lost and an ugly down gap still hanging over the stock, I see little evidence for optimism in the short run. Neutrality rules the day, and so long as she sits on the throne, Workhorse is a stock best avoided. I suggest searching elsewhere for higher odds trades.
A second reason influencing my bias, at least in the short run, is this week’s slide in small caps. For weeks, the little guys have been performance leaders. So much so that the Russell 2000 recently eclipsed the year-to-date gain of the S&P 500. It’s a feat that would have been thought impossible earlier in the year when large caps were beating the pants off of small caps.
Many will argue (and rightly so) that the red-hot Russell was overdue for some profit-taking. And despite Tuesday’s 2% whack, the index is still up some 17% on the year. Both points are valid.
Nonetheless, I’ve kept tabs on the biggest losers this week, and many are high growth momentum stocks, a group which WKHS stock calls home. While these names are out of favor, I struggle to see a bullish backdrop for Workhorse.
In laying out what it would take for me to warm to long trades again, we need to visit the price chart.
WKHS Stock Chart
The daily chart shows Workhorse’s gradual shift from up to sideways in recent months. As mentioned above, the flat 50-day moving average tells the tale. We’ve now been hugging this oft-watched smoothing mechanism for nearly a month as buyers and sellers battle it out. On Friday, we attempted an upside breakout, but the bid ultimately failed.
Now, after two days of selling, we’re back to fiddling in the middle of the range. There’s a heap of potential support between $15 and $20, which makes shorting really hard here.
In the end, closing above $24 is what it will take to pull me back to the bulls’ camp. Doing so would create a higher pivot high and put us back above all major moving averages. In the past, this is what it’s taken for momentum to take root. Until then, I don’t like the odds for bullish trade ideas.
Bull Calls on a Breakout
To prepare for a potential upside resolution, let’s kick around a trade idea. With WKHS stock averaging over 10 million shares a day, there’s obviously plenty of liquidity for a long stock play. If you’re looking for a lower-cost and potentially more leveraged route, then the options market beckons. The bid-ask spreads are extremely tight, and there’s ample open interest across a variety of strikes.
Implied volatility is relatively high, given the stock’s volatile nature. This translates into expensive premiums and makes me favor spreads over purchasing options outright. On a break above $24, I suggest buying Feb $25/$30 bull call spreads.
The cost should be between $1.60 and $2.
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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