It is a big story that the equity markets are still breaking records in the face of tremendous trepidation. But do you want a bigger story? Just look at what is happening in Tesla (NASDAQ:TSLA) stock. Just yesterday, it rallied 18% then closed down 3%. This morning it is up another 4%. The craze for electric vehicles has gone parabolic. Nikola (NYSE:NKLA) is one of those up-and-coming names in the segment. So, what do you need to know about Nikola stock?
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First, they made news recently with their reverse merger. The bigger news is how the stock is behaving — and therein lies the conundrum.
There is concern that it went as far as it could go in June, but some think it is merely basing for another super spike. Logic dictates that it ran too fast and it needs a lot of time to digest its move. But the risk for the bears is that Nikola stock could be doing what Tesla did after its super spike from February. In other words, shorting NKLA can be hazardous to portfolios. There are two easy choices for investors: plug your nose and buy it for the long-term, or else avoid it completely.
Nikola Stock Fans Need to Have Faith Not Proof
There is no argument around valuation here, because there are no metrics to help guide investors. The thesis is almost all theoretical, based on some truth from what happened in Tesla. Electric vehicles had broadly been failures until Elon Musk made them cool. Wall Street is rewarding him as the first-mover there, but it is not a guarantee that it’s infectious. Only time will tell if the hype around Nikola stock will also be as substantive.
Their formula for success, according to company spokesperson Trevor Milton, is in its complete package with the fuel offering, especially on the hydrogen cell side. Therefore it’s not a complete copy of what Tesla did but it definitely is leveraging the groundwork that the original laid in place. Electric cars are not new — they’ve been around since the 1800s. But so far the challenges that they mounted against the internal combustion engine have been losing efforts. This is the most serious momentum yet and it looks good for the long haul.
Consensus now is that with time, we will all be driving electric cars. I want to see more more divestiture from fossil-fueled electric generation before adopting that mantra. In other words, I would be more excited about this idea if the cars are charged by way of renewable fuels like the sun or the wind. But so far we still rely on fossil fuels to create the electricity to charge these cars. The EV carbon footprint is too close to the hybrid engines, and those are easier on the pocket-books.
It Can Contribute to Making our World a Cleaner Place
Source: Charts by TradingView
I do like the direction that humans are going in, but I think this stock may have come too far too fast. We can’t discuss Nikola stock without talking about what’s going on in Tesla stock and it has quadrupled in mere weeks. Momentum like this is hard to maintain without sharp corrections. On the other hand, the recent action in NKLA is somewhat worrisome. It peaked near $93 in early June then fell almost 60% from that top. So far it has recovered some of it but not even half, so onus is on the bulls to rebuild the momentum.
They are trying because the buyers are setting higher-lows but also lower-highs and the range is coming into a tight point. Usually this builds energy that will need to disperse with force. Meaning there is a move coming in Nikola stock but the direction of this is still not known.
There is resistance at $60 per share. But that is also could serve as the trigger for a small rally before it hits the second line of resistance $9 higher.
The good news is that there is support at $40 per share, which served as the base for the super spike in June. The bulls and bears of Nikola stock are definitely fighting it hard here.
From an investment perspective you either believe in the stock or you don’t. Furthermore, you either trust in the segment or you don’t. The truth cannot be settled now — Wall Street will have to wait years to learn the true strength of the EV market. But the trading battle now is exciting to watch and the charts have defined the field of play.
Management Has the Stage so it is Up to Them
Meanwhile, there will be earnings reports and other launch headlines that will spur price action but they are all binary. That means it is a guessing game without insider information. Needless to say this is a perfect formula for high risk — it’s closer to what goes on in Vegas than in investment portfolios. Don’t confuse this with criticism — it is a legitimate threat and has earned the trust of serious money worldwide. But nobody is foolproof as we’ve learned of what happened with WeWork. Seriously experienced investors completely misread the potential of of that flop.
Nothing is set in stone, and until then Nikola remains a speculative trade inside serious portfolios. This is not a stock for the faint of heart and the options market can make it more tolerable but that is a topic for a different write-up.
Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.