It is no secret that stocks are prone to sudden moves in either direction. This could be triggered by economic data, geopolitical events, stock-specific news, or market sentiment.
Trading such volatile stocks are usually considered a high-risk-high-reward venture. Many traders opt to stay out of the trade rather than risk a loss. However, careful analysis of the charts could help you to enter at the right levels, thereby limiting risk to an extent.
With this in mind, we recently started a new weekly series on what we’re calling “the trending stock of the week” —stocks that are being featured heavily in the news right now.
This week’s stock pick is Nio Inc – ADR (NYSE: NIO)
Why is NIO trending?
Dubbed “the Tesla of China,” electric vehicle maker Nio Inc. has surged in 2020, more than doubling its price in just November alone. Nio stock represents an investment in an EV outfit that makes affordable vehicles.
NIO’s run was fueled by the accelerating growth in the Chinese EV market, as well as better-than-expected earnings and deliveries from NIO. The Chinese automaker’s upmove was also aided by the possibility of a thaw in U.S.-China trade relations due to the election of Joe Biden as the US president, and increased prospects for electrical automobiles in the USA under the incoming Biden administration.
Nio reported 5,055 vehicle deliveries in October, up 100.1% compared to a year ago. The company’s revenue was up 146% in the quarter to $4.53 billion, and the stock’s market cap now stands at $72.5 billion. Nio is expected to report monthly delivery figures late next week.
However, there are also headwinds for the stock, like the approval received by Tesla to sell its Model Y crossover in China (making it a direct competitor for NIO), fraud allegations against Chinese electric-vehicle maker Kandi Technologies, and the upcoming vote on the Holding Foreign Companies Accountable Act, which could lead to the eventual delisting of Alibaba stock, JD.com (JD), Nio (NIO) and other China stocks.
Here’s how to trade NIO right now.
NIO’s daily and weekly chart show that the overall trend of the stock is up. However, on analyzing the hourly chart of NIO, the current uptrend seems to have been broken. Therefore, trading this stock should be done with caution, making sure that you enter only at the recommended levels.
On analysis, there are multiple bullish indications on the daily chart of NIO.
#1 Unbroken Uptrend: The daily chart shows that the stock’s uptrend is unbroken, as it has been forming higher highs and higher lows for the past several months.
#2 Price Above MAs: The stock is currently above the 50-day as well as 200-day SMA, indicating that the bulls are still in control.
#3 Fibonacci Support: Usually, after an up-move, stocks typically retrace to any of the key Fibonacci levels before surging back again. NIO had taken support near the 78.6% Fibonacci level as seen in the daily chart before moving higher again. This is a possible bullish sign.
#4 Bullish ADX and DI: The ADX line has moved up from below –DI and +DI lines. The +DI line and the ADX line is also currently above the –DI line. This indicates possible bullishness.
Recommended Bullish Trade (based on the chart)
Buy Levels: If you want to get in on this trade, the ideal buy level for NIO is above the previous high, which translates to a price of around $56.00. This is marked as a green color dotted line in the daily chart.
Important Note: Make sure that you only enter the trade once the daily close is above the recommended price level.
TP: Our target prices are $65 and $70 in the next 1 to 4 months.
SL: To limit risk, place a stop loss at $50.40. Note that the stop loss is on a closing basis.
Our target potential upside is 16% to 25% in the next four months.
For a risk of $5.60, our first target reward is $9.00 and the second target reward is $14.00. This is a nearly 1:2 and 1:3 risk-reward trade.
In other words, this trade offers 2x to 3x more potential upside than downside.
Risks to Consider: The stock may reverse its overall trend if it breaks down from the previous high price with a high volume. The sell-off of the stock could also be triggered in case of any negative news, poor earnings, overall weakness in the market, or any regulatory changes in the sector.
Recommended Bearish Trade (based on the chart)
As mentioned earlier, NIO has currently broken down from its uptrend as per the hourly chart. There are also certain bearish indications like a bearish MACD, and bearish Stoch in the hourly chart. Therefore, if the stock breaks down from the nearest support area, it could point to an upcoming short-term correction. In that case, below are the entry levels, stop loss levels, and target prices.
Sell Level: You can take short positions on NIO if it closes below the support level of around $48.20. This sell level is marked as a red color dotted line in the chart.
Important Note: Make sure that you only enter the trade once the daily close is below the recommended price level.
TP: Our target prices are $45 and $40 in the next 3-6 months.
SL: To limit risk, place a stop loss at $50.10. Note that this stop loss is on a closing basis.
Our target potential downside is 7% to 17% in the next 3-6 months.
For a risk of $1.90, our target rewards are $3.20 and $8.20. This is a nearly 1:2 and 1:4 risk-reward trade. In other words, this trade offers nearly 2x to 4x rewards compared to the risks.
Risks to Consider: The stock may reverse its overall trend if it breaks above the earlier uptrend line with high volume. The breakout of the stock could be triggered in case of any positive news, overall strength in the market, or any regulatory changes in its sector.
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