Last year, momentum traders fell in love with the Chinese electric vehicle (EV) company, Nio (NYSE:NIO), and they remain fanboys to this day. Their affection for Nio stock has certainly been tested, though.
Two major corrections have struck this year, bringing steep losses to those who held through.
NIO stock finds itself in the midst of one such downtrend currently. It has been plagued by souring sentiment surrounding emerging markets, with China specifically in the crosshairs.
In 2020, NIO soared more than 1,000%. If nothing else, this year’s 26% decline serves as a reminder of just how rare last year’s explosion was.
NIO Stock Volatility Remains
Not that buyers didn’t try for a repeat. The first two weeks of the year saw one more push higher before it all fell apart. One halving and another 36% decline later, and we find ourselves nearly 10 months into a disappointing yet altogether understandable sequel to last year’s drama.
While the rocket ship ride has lost its upward trajectory, the higher volatility remains. I consider this one primary reason why NIO still deserves a spot on active traders’ radar.
Yes, the higher beta is currently working against shareholders due to the multi-month downtrend, but that can turn on a dime.
Just look at the May-June episode, for instance. After bottoming near $30, prices rose above the 20-day, 50-day, and 200-day moving averages. Though brief, the ensuing uptrend lifted prices by 80%.
The surge reminded investors of the good old days of 2020 while providing plenty of opportunities for trend traders.
Echoes for Traders Today
I view the situation similarly today. Nio has been stuck in a downtrend for more than two months. All major moving averages are gliding lower and sit threateningly overhead as potential resistance zones. Nonetheless, a breakout above them could spur a new uptrend and fresh chances for bulls to build profitable trades.
Ultimately, I think that’s what spectators should wait for. The May episode didn’t require you to pick the bottom to profit. Nor too does this one.
To be clear, I don’t think it’s smart to enter bullish trades on NIO stock at the moment, be it long stock or options. It doesn’t mean it can’t work. It just means the odds are against it working. Instead, I suggest waiting for NIO to at least clear the 50-day moving average, which currently sits near $40.
Yet another reason supporting caution is the iShares China Large-Cap ETF (NYSEARCA:FXI). Like it or not, NIO’s fate is tied to a certain extent to that of other Chinese equities. And right now, the entire space is very much out of favor with investors.
In trader speak, we say they have a positive correlation. It’s not impossible for Nio to rise; it’s just harder – like swimming with an anvil tied around your ankle.
The U.S. markets have done an admirable job of shaking off the potential default of Evergrande (OTCMKTS:EGRNF) this week, no doubt thanks in large part to the Federal Reserve’s soothing commentary.
But FXI hasn’t fared as well. It needs more lift to turn its trend fully.
What to Do
Let’s conclude with two actionable takeaways.
The first and safest choice here is to sit on the sidelines and wait for NIO to reverse its trend.
But, if you pressed me for a trade, I’d probably rather lob OTM naked puts and hope NIO is close to a bottom than go bearish. Consider shorting the November $30 put for around $1.05. You’ll pocket $105 per contract if the 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. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
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