Nio (NYSE:NIO) is finally departing bear country. Traders with an interest in electric vehicle stocks have been waiting for this moment. Ever since NIO stock fell into a downtrend in February, prices have been plumbing the depths, searching for a bottom. I’m happy to report the low has been found with the recent surge, and NIO’s sojourn in the wilderness is at an end.
While it remains to be seen if the Chinese-based company can recapture the magic of 2020, the path of least resistance has at least shifted from lower to higher.
Let’s take a closer look at the turnaround to see what price levels are worth watching moving forward. We’ll start with the breakout bid in small-caps because it underscores the sentiment shift recently seen.
Small-Cap Breakout Carries Big Implications
While the S&P 500 has been notching new highs every month, the Russell 2000 has been stuck in a trading range. The neutrality first struck in February and corresponded with the fallout in growth stocks. In the months since, the leadership has come from large-caps and value companies. Those rooting for momentum to return to growth land have also been hoping for small-caps to end their slumber and start running again.
As the Russell 2000 ETF (NYSEARCA:IWM) shows below, small-caps are waking up. While more confirmation may yet be needed, there’s no denying IWM is trying to push through the top end of its range on Tuesday. With the other indexes slightly in the red this morning, IWM is unfortunately not receiving any help from the rest of the market.
I suggest watching the little guys over the next week. For plays like NIO stock to really run, we probably need to see continued strength from small-caps.
NIO Stock Charts
Let’s start with the weekly chart to grasp the big picture better. Earlier in the year, NIO topped a penny shy from $67 before cratering to $30. The -55% thrashing was massive, yes, but not uncharacteristic of the corrections that strike stocks that previously grew from $3 to $67 virtually uninterrupted. We ultimately found support at the rising 50-week moving average, and NIO is currently working on its fourth up week in a row. Unfortunately, we’re now wrestling with overhead resistance at $45.
We might need some time to chew through the supply before the next stage of the stock’s recovery.
Drilling into the daily time frame reveals greater detail. The first development of note is May’s bear trap. Prices breached the $34.50 support zone and suckered in short-sellers, only to rip right back up, effectively trapping them. I suspect part of the buying strength seen over the past two weeks has been short-sellers getting squeezed.
Along the way, prices have climbed above the 20-day, 50-day, and 200-day moving averages. It’s the first time we’ve been above all three since the correction began three months ago.
Bank on a Bottom with Short Puts
If you’re willing to bet the bottom is in, then naked puts are worth a shot. They carry a high probability of profit, so even if NIO stock trades sideways or a little lower, you’ll still depart with a gain.
The Trade: Sell the July $35 naked put for 70 cents.
Consider it a bet that NIO sits above $35 at expiration. If it does, you’ll pocket the 70 cent premium. By selling the put, you are obligated to buy shares at a cost basis of $34.30, which may not be a bad entry point if you like the company longer-term.
On the date of publication, Tyler Craig held LONG positions in IWM. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
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