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 have started a new weekly series on the trending stock of the week —stocks that are featured heavily in the news.
This week’s stock pick is Xpeng Inc – ADR (NYSE: XPEV), the Chinese electric vehicle manufacturer. XPEV sells premium electric vehicles, including the G3 SUV and the P7 four-door sedan.
Why is XPEV trending?
The leading Chinese smart electric vehicle company has surged nearly four-fold since the company got listed on NYSE in late August 2020. This was mainly due to its improved margins, positive earnings report, and strong delivery numbers; development of innovative autonomous driving concepts; entry into the European auto market with an initial batch of 100 G3 SUV deliveries to Norway; efficient management crew; and a robust domestic market.
However, the stock decline by about 40% since late-November due to multiple factors like its high valuations (XPeng trades at almost 40x projected 2020 revenue); the passing of the bill ‘Holding Foreign Companies Accountable Act’ by the U.S. House of Representatives that could force Chinese companies to delist from American exchanges; and XPeng cashing in on its growing valuation by raising over $2 billion this month by issuing about 48 million new American depositary shares at a slight discount to the company’s market price at the time.
Here’s how to trade XPEV right now.
On analysis of the daily chart of XPEV, the overall trend of the stock seems to be up and the current decline in the price appears to be a short-term correction.
#1 Stock Near Fibonacci Support: Usually, after an up-move, stocks retrace to any of the key Fibonacci levels before resuming its upmove. The daily chart shows that the stock has currently taken support at its 38.2% retracement level. This seems like a good support area for the stock to bounce higher.
#2 Oversold RSI: The Relative Strength Index is currently near oversold levels. This indicates that a reversal may be imminent.
#3 Oversold Stochastic: The stochastic is currently starting to move up from oversold levels. This indicates possible bullishness.
Recommended Bullish Trade (based on the chart)
Buy Levels: If you want to get in on this trade, the buy level for XPEV is in two scenarios. These are marked as green color dotted lines in the daily chart.
- Buy Level #1: You can purchase the shares of XPEV if it trades above the nearest resistance level, which translates to a price of $41.50.
- Buy Level #2: You can purchase the shares of XPEV if it corrects to the previous Fibonacci support level of 23.6%, which translates to a price of $30.60.
Important Note: Make sure that you only enter the trade once the daily close is above the recommended price level.
TP: Our target prices for various buy levels are as follows
- The target prices for Buy Level #1 (41.50) are $50 and $60 in the next 3 to 6 months.
- The target prices for Buy Level #2 ($30.60) are $40 and $50 in the next 3 to 6 months.
SL: To limit risk, place a stop loss at the following levels.
- The stop loss for Buy Level #1 (41.50) is $36.20.
- The stop loss for Buy Level #2 ($30.60) is $26.00.
Note that the stop loss is on a closing basis.
Target Upside: Our target potential upside is 20% to 63% in the next 3-6 months.
- Entry at Buy Level #1(41.50): For a risk of $5.30, our first target reward is $8.50 and the second target reward is $18.50. This is a nearly 1:2 and 1:4 risk-reward trade.
- Entry at Buy Level #2 ($30.60): For a risk of $4.60, our first target reward is $9.40 and the second target reward is $19.40. This is a nearly 1:2 and 1:4 risk-reward trade.
In other words, this trade offers 2x to 4x more potential upside than downside.
Risks to Consider: The stock may reverse its overall trend if it breaks down from the Fibonacci support levels with high volume. The sell-off of the stock could also be triggered in case of any negative news, overall weakness in the market, or any regulatory changes in the sector.
In case the stock breaks down from the 23.6% Fibonacci support level and closes below the price of $27.50, it would point to the reversal of the prevailing uptrend and the beginning of a downtrend for XPEV. This reversal level is marked as a red color dotted line in the daily chart.
— Trades of the Day Research Team