The past two trading sessions have seen an awakening in beaten-down momentum stocks. And since electric vehicle stocks like Nio (NYSE:NIO) sit squarely in the momentum camp, it’s been a positive development for the entire industry. NIO stock fanboys will find this to their liking.
Prices of the once-hot-now-not EV company are attempting a double-bottom pattern that bears watching.
Today we’ll break down the action and tell you the exact levels that matter. As always, I’ll conclude with a top-shelf trade idea if you’re inclined to cast a line with all the other bottom fishers. To set the stage, let’s begin with what could arguably be the fund that most represents investor appetite for risk – the ARK Innovation ETF (NYSEARCA:ARKK).
ARKK Points the Way
Cathie Wood’s flagship exchange-traded fund, ARKK, has taken the Street by storm over the past year, with its net assets ballooning past $17.5 billion.
Per the fund’s description, “ARKK is an actively managed ETF that seeks long-term growth of capital by investing under normal circumstances primary (at least 65% of its assets) in domestic and foreign equity securities of companies that are relevant to the Fund’s investment theme of disruptive innovation.”
It counts the who’s who of momentum stocks among its top holdings, from Tesla (NASDAQ:TSLA), Square (NASDAQ:SQ), and Teladoc Health (NASDAQ:TDOC) to Roku (NASDAQ:ROKU), Shopify (NASDAQ:SHOP), and Zoom Video Communications (NASDAQ:ZM). Its price chart went parabolic following the pandemic, ultimately peaking just under $160 before the recent rug-pull stole back a third of its value. Every industry connected to the momentum space, including cannabis, solar and EV, saw similar fallouts.
And, this is the first of a bottom finally forming since the mid-February top. With the twin rallies on Tuesday and Wednesday, ARKK was able to stave off a support break and form the beginnings of a potential double bottom or “W” pattern. The location of the bounce wasn’t a coincidence. The $109 level marked the previous pivot low. It also hosts the rising 200-day moving average, which hasn’t been tested since we surged above it last April. The above-average volume accompanying yesterday’s ramp confirms big buyers are returning.
It’s worth noting that we’re in the early innings of the trend reversal here. Yet, there’s no denying momentum stocks look far better today than they did entering the week.
NIO Stock Chart
The first thing that jumps out when looking at NIO stock is how much its behavior has mirrored ARKK. It illustrates just how monolithic the momentum segment of the market has become. When risk appetite is rising, NIO and friends soar. But when the flip switches, watch out below! All momentum stocks get tossed.
ARKK’s double-bottom attempt is echoed by NIO stock. Ironically, the turnabout bid is occurring right by the 200-day moving average for Nio as well. I consider the fate of both of these symbols intertwined. NIO must first break above the falling 20-day moving average for a full-fledged trend reversal to arrive, then, ultimately, push above the $46 resistance pivot.
Cautious traders might wait for one of these two milestones to transpire before pulling the trigger. For everyone else willing to wade into the waters now, I prefer selling puts.
The Trade: Sell the May $30 put for $1.20.
The max gain of $120 per contract is yours to keep if NIO stock sits above $30 at expiration.
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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