This High Risk / High Reward Stock Looks Poised for a Breakout

We recently started a series called “Penny Stock of the Day”. These ideas are geared for traders with an extremely high risk appetite.

Our Penny Stock of the Day is chosen by screening for stocks under $5 and then applying technical analysis on the shortlisted set of penny stocks showing unusual volume. When making these trades, please make sure to pay vigilant attention to pricing moves and have a strict stop loss in place to avoid significant losses.

Penny Stock of the Day: RLX Technology Inc. (NYSE: RLX)

Today’s penny stock pick is the Chinese e-cigarette company, RLX Technology Inc. (NYSE: RLX).

RLX Technology Inc., together with its subsidiaries, researches, develops, manufactures, distributes, and sells e-vapor products in the People’s Republic of China. It serves RELX branded partner stores and other retail outlets through distributors.

Website:  https://ir.relxtech.com

Latest 10-k report:  https://sec.report/Document/0001104659-21-054146/

Analyst Consensus: According to TipRanks Analytics, based on 1 Wall Street analyst offering 12-month price targets for RLX in the last 3 months, the stock has a ‘Hold’ rating and a $4.10 price target.

Source: TipRanks.com

Potential Catalysts / Reasons for the Hype:

  • The company announced a share repurchase program in response to its dwindling stock price. RLX said in a press release that its board of directors has authorized a share repurchase of up to $500 million by the end of 2023.
  • Hedge Funds increased holdings by 748.6K Shares last quarter.

    Hedge Funds | Source: TipRanks.com

  • RLX is currently trading way below comparable US companies with a consumer base that is at least five times the size.

On analyzing the company’s stock charts, there seem to be multiple bullish indications…

Bullish Indications

#1 Falling Wedge Pattern: The daily chart shows that the stock was forming a falling wedge pattern for the past several weeks. These are marked as purple color lines. It has typically taken support at the bottom of the wedge before bouncing back. The stock looks currently poised to break out of the falling wedge pattern with high volume, indicating possible bullishness.

RLX – Daily Chart

#2 Bullish ADX and DI: The ADX indicator shows bullishness as the +DI line and ADX line are above the -DI line, and the ADX line has currently started moving higher from below the +DI and -DI lines.

#3 Bullish Stoch: The %K line of the stochastic is above the %D line, and is moving higher from oversold levels, indicating bullishness.

#4 Above Support Area: The weekly chart shows that the stock is trading above a support area, which is marked as a pink color dotted line. This is a possible bullish indication.

RLX – Weekly Chart

#5 Bullish MACD: In the weekly chart as well, the MACD line is above the MACD Signal line, indicating possible bullishness.

#6 Oversold RSI: The RSI is presently moving higher after reaching oversold levels, indicating that a reversal may be imminent soon.

Recommended Trade (based on the charts)

Buy Levels: If you want to get in on this trade, the ideal buy level for RLX is above the price of $5.70. However, you can purchase half the intended quantity of shares of RLX above the price of $5.10. These buy levels are marked as green color dotted lines in the daily chart.

Target Prices: Our target prices are $7.00 and $8.50.

Stop Loss: To limit risk, place a stop loss below $4.90 (for entry near $5.70) and $4.00 (for entry near $5.10). Note that the stop loss is on a closing basis.

Our target potential upside is 23% to 67%.

  • Entry near $5.10: For a risk of $1.10, our first target reward is $1.90, and the second target reward is $3.40. This is a nearly 1:2 and 1:3 risk-reward trade.
  • Entry near $5.70: For a risk of $0.80, our first target reward is $1.30, and the second target reward is $2.80. 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.

Potential Risks / Red Flags:

  1. The company recently reported a disappointing Q3 earnings report, in which revenue fell 34% to $260.2 million in response to a crackdown on vaping by the Chinese government.

    RLX – Q3 Report

  2. Bank of America analyst Louise Li lowered the price target on RLX Technology (NYSE: RLX) to $4.10 (from $6.30) while maintaining a Neutral rating.

    Recent Analyst Ratings | Source: TipRanks.com

  3. RLX has been a loss-making company. The company recorded a net loss of RMB0.3 million for the 2018 period, generated a net income of RMB47.7 million for the year ended December 31, 2019, and recorded a net loss of RMB128.1 million (US$19.6 million) for the year ended 2020.

    RLX – Consolidated Statements of Comprehensive Loss

  4. There is an overall deterioration in the investor climate in China, making it risky to invest in Chinese companies. The recent decision of delisting the ridesharing giant Didi, is a case in point. Officials at China’s Securities Regulatory Commission (CSRC) have been resisting the U.S. Securities and Exchange Commission’s information disclosure requirements, citing that they could reveal potentially sensitive market information. Officials are seeking to steer China’s tech giants to the Hong Kong exchange instead.
  5. The bottom-line is that the increasing Chinese tobacco regulations (The Chinese government announced they are going to increase regulations and fees on e-cigarettes), worsening investor climate, and the weak results despite Company pulling in about $700 million in gross profit makes RLX a high-risk gamble.

As you can see, today’s featured penny stock offers big upside potential… but it also comes with a number of risks and red flags. As always, when dealing with penny stocks, we advise caution before entering into such high-risk ventures. Remember to think before you trade… understand the risks… and if you decide to trade, stick to your stop-losses!

Happy Trading!

— Trades of the Day Research Team

READ BEFORE TRADING PENNY STOCKS: The allure of penny stocks lies in their potential to deliver massive gains in a short period of time. However, in exchange for that opportunity, most penny stocks carry tremendous risk. They can be extremely volatile and are susceptible to “pump and dump” schemes and fraud.

Unlike regular stocks, the financial condition of most penny stock companies can be extremely difficult to analyze, as the majority of such stocks are traded on over-the-counter (OTC) exchanges, which are typically less transparent and less regulated than the major exchanges. In fact, in the penny stock space, it’s often easier to spot warning signs and red flags than it is to identify a sound investment. Nevertheless, we do our best to identify short-term trade opportunities in this exciting space because we know some of our readers are looking for high-risk, high-reward ideas. We just urge you to make sure you fully understand the risks before making any of these trades.

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