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It’s Time to Pump the Breaks on Buying Nio Stock

A battle is brewing in Nio (NYSE:NIO). The electric vehicle maker has been battered by bears over the past three months, driving prices lower by nearly 50%. But support has sprung up at the 200-day moving average as long-term bulls come to its defense. With earnings coming around the corner for NIO stock, traders may not need to wait long for a resolution to the tug-of-war.

A close-up shot of the Nio (NIO) ES8 vehicle.
Source: xiaorui / Shutterstock.com

Today we’ll help you make a better decision on if, when and how you should trade NIO. The price is forming a textbook descending triangle pattern. That makes it easy to identify which price levels matter. Whether you bet with the bulls or the bears ultimately comes down to whether support or resistance blinks first.

Before dissecting the daily pattern, let’s first look at the weekly view to chronicle Nio’s journey thus far.

Examining the NIO Stock Charts

Source: The thinkorswim® platform from TD Ameritrade

Traders are relearning that momentum is a double-edged sword. If you’re going to be a long-term investor in riskier, high-growth stocks, then you have to be willing to stomach some gut-wrenching bear markets along the way. Watching your beloved investment lose half of its value in a few short months is difficult, but what do you expect out of a stock like NIO, which ballooned from $2 to $66?

Even after the recent thrashing, it’s still up an epic amount since last March’s trough.

One of the drawbacks to a parabolic ascent is it doesn’t leave much support when the stock finally turns lower. As a result, the inevitable correction is often quite severe. With the current decline, NIO broke its 20-week moving average and a prior support pivot. That makes this more than a garden variety pullback. But since we’re still above the rising 50-week average, I’d stop short of saying the weekly trend is decisively bearish.

Sellers hold the upper hand, but there’s still a chance this is a longer-term buying opportunity. Fortunately, the daily chart reveals the detail needed for mapping out a trade.

The dominant pattern on the daily time frame is a descending triangle pattern. It consists of a series of lower pivot highs that show overhead supply is increasing. Traders are officially in “sell the rallies” mode.

Until that reverses, it’s hard to get excited about the bullish prospects for Nio stock. It could be worse, though. Buyers are aggressively defending $34, which also hosts the 200-day moving average. With the apex of the triangle fast approaching, we should see resolution (up or down) soon.

Nio (NIO) daily stock chart with descending triangle
Source: The thinkorswim® platform from TD Ameritrade

If we don’t see a breakout in the next week, the upcoming earnings announcement is sure to be the catalyst that completes the triangle.

Trading Choices

Guessing the direction of the eventual breakout is risky. Instead, I suggest waiting for confirmation to increase your odds of success. That ultimately leaves us with two trade ideas: one for bulls and one for bears.

Bulls should consider waiting until we breach resistance at $39.50 or $42. Pushing above either level will finally interrupt the series of lower pivot highs that has been in place since the stock peaked. If you want to keep the trade simple, buy shares. Otherwise, bull call spreads offer a more leveraged route.

For those looking to game the next down-leg, you must wait for a break of $34. History has proven there’s heavy demand for the stock at this price level. If it’s taken out, NIO stock has a straight shot to $29.

The wild card for both plays is the upcoming earnings report. If you’re unwilling to roll the dice into the event, then don’t.

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/2021/04/its-time-to-pump-the-breaks-on-buying-nio-stock/.

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