Just a few weeks ago, I wrote about investing in Nikola (NASDAQ:NKLA) stock. The point of my article then was that the price action had tightened up and that a move was coming. At the time I leaned bearish on the direction of that move but only for a trade not as an overall thesis. What followed was a tremendous bearish drive that cost Nikola stock 44% of its value.
Today’s writeup is to take the other side and let the fans of the stock know that there could be better days ahead after this big adjustment in price.
The hoopla from last month is long gone and the stock is now 60% off its highs. But in fact, nothing has changed since then other than the stock price levels. The thesis is still binary and the results won’t be out for years, so investors either believe in the stock or they don’t.
Nikola Stock Can Ride the EV Wave
The popularity of electric vehicles is as high as ever and the hope is that Nikola would be another Tesla (NASDAQ:TSLA). It is rare that the second comers are as successful as the first movers, so TSLA stock may be a special case for a long while. This doesn’t take away from Nikola stock’s long-term prospects. Trying to snipe a perfect entry point into it is futile, especially if the holding period for the shares is years not days.
In this case, the Nikola stock bulls can have their cake and eat it too. Since my write-up on July 14, the stock got cut in half and more importantly fell into a technical support zone. NKLA doubled in a matter of days, then consolidated for a few weeks before it rallied another 200% from there. Then, sadly for the bulls, it give it all up and it’s almost back to the starting point. This is where it makes sense to buy the dip.
Clearly this is a momentum stock, and those are tricky for most traders. They never offer an easy entry point because they are either rallying too fast or crashing into an abyss. Some level of recklessness is required to trade them, and that decision to buy it after a massive fall becomes easier. Those who wished they owned it through the June rally now have the opportunity to get into it on the ground floor even after the huge bounce on Monday.
Tesla Smoothed the Path but NKLA Still has to Drive it
Management is still unproven from the standpoint that the company is still a concept. Tesla’s hard work provided the proof that there definitely is a market for electric vehicles, so Nikola should have less friction than the original did. But a market alone does not guarantee the success of the all EV companies.
Moreover Nikola stock is a slightly different because it is also trying to put a spin on it with the hybrid gas method. After seeing a company spokesperson on CNBC I was not encouraged to jump on board the stock at its highs. I would be more inclined to do so after the crash that followed. The company rep back then was just too flashy for my taste.
The drop is an opportunity for the bulls to load up and for the bears to book their profits. From here the outcome is still binary and the results won’t come for years. Maybe Nikola stock’s best days are behind it, but many said that about Tesla — even as recently as last year! Yet here it is, almost 10 times the price that it was back then. At some point investors have to stick to their thesis and ignore the news. There are no experts in this field, only speculators. And from that standpoint owning NKLA is a viable thesis for at least another year.
This Is a Risky Bet, So Size Matters
This is a speculative stock. Add to that fact the macroeconomic uncertainties that plague the world, and investors should only take partial positions. Taking a full bite all at once is piggish behavior fraught with risk. Size matters a lot especially with unproven tickers. Besides, taking the position in tranches leaves room to manage the risk should price go the wrong way again. Those who bought a full position in NKLA stock at $90 are now stuck underwater for a while. Had they taken partial orders, they could now average down to lower the breakeven line a bit.
We will hear from management soon enough, and so far they’ve been successful at creating buzz around the company. Maybe on the event they can sway investors back into believing it deserves to be above $60 per share stock. Technically, just as I saw support near $25 per share, I see a lot of resistance going into $50 per share. The message from management better be something fantastic if they want to break above it. Gaps on the charts are enticing for a lot of bulls, but the one near $48 is likely to remain open for a while.
I am bearish the stock but not shorting it. Too much risk comes with shorting such a momentum stock. Those who are itching to do that should use the options markets, where they can limit the maximum damage. Otherwise shorting Nikola stock via the traditional way carries unlimited risk. There just isn’t enough information to do that with conviction.
