It has been a crazy news-driven week for Nikola (NASDAQ:NKLA). But for investors looking at tomorrow and beyond, is Nikola stock a buy or a name to steer clear of? Let’s review what’s happening in the shares, then offer a risk-adjusted determination in alignment with information both off and on the price chart.
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Big swings have been the norm for the broader market this week. A continued corrective swoon on Tuesday followed by back-to-back days of oversold bargain hunting has proven volatile and widespread. From established household names Apple (NASDAQ:AAPL) or Home Depot (NYSE:HD) to momentum favorites Tesla (NASDAQ:TSLA) and Zoom Video (NASDAQ:ZM), forceful selling uprooted by more buoyant buying has been a popular route for most risk assets.
It has been a different sort of week for Nikola stock though.
Macro political threats and short-lived fears of an overpriced market responsible for driving much of the price action on Wall Street haven’t moved Nikola shares. That’s not to say Nikola hasn’t reacted in a big way this week. On the back of countering, company-specific reports Nikola investors have endured an even bumpier ride largely decoupled from the broader averages.
In Tuesday’s session and as the market continued to slide lower into correction territory, Nikola stock soared higher by nearly 41%. The catalyst behind the melt-up was the announcement of a $2 billion partnership with General Motors (NYSE:GM). In a nutshell, GM will receive a 11% stake in the hot EV startup in exchange for producing Nikola’s fuel cell pickup truck. It’s a win-win, right? Maybe. And Tuesday’s one-way street price action has taken a decided detour.
Selling pressure from investors questioning the deal’s benefits and conditions ripe for profit-taking on Wednesday grew much uglier in Thursday’s session after one of Wall Street’s more notorious short sellers, Hindenburg Research, warned NKLA investors of a history of lies by the company, deception and outright fraud.
The Daily Price Chart for Nikola Stock
Source: Charts by TradingView
It’s not the first time the advisory firm has put Nikola in its cross-hairs. It stands to reason the research note could hold less weight, particularly with GM immediately releasing a statement it stands by its new partnership. Yet, as noted, the price action has turned surprisingly weak. And it could be warning of a decidedly more bearish path for shares.
Technically, risk-tolerant investors may want to play the Hindenburg warning and gain short delta exposure if Nikola shares break beneath last week’s bullish higher-low pattern, which has developed around the 76% Fibonacci level. A failure points at increased odds that a full return move will be in play that could see NKLA stock dropping into the high single-to-low double digits.
Ultimately, bullish investors still maintain the pattern advantage on the daily chart. But unusually weak price action warns further deterioration could be the last straw and put bears in a strong position to push Nikola stock aggressively lower. If that day arrives and if investors are like me, a defined and limited risk, slightly out-of-the-money bear put spread is the go-to strategy for driving profits and securely reducing exposure in a stock where underestimating risk can prove catastrophic.
On the date of publication, Chris Tyler did not hold, directly or indirectly, positions in any of the securities mentioned in this article.
Chris Tyler is a former floor-based, derivatives market maker on the American and Pacific exchanges. The information offered is based on his professional experience but strictly intended for educational purposes only. Any use of this information is 100% the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT and StockTwits.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.