Chinese electric vehicle manufacturer Li Auto (LI) has been swinging higher recently, gaining nearly 23% of equity value in the past five sessions. However, such robust moves over a one-week period are rare, representing about 5% of the collective price action of LI stock. Further, historical trends don’t necessarily bode well for bullish investors, warranting caution — or even a bearish approach.
To be sure, having a negative outlook goes against the current prevailing trend. One of the key catalysts of the incredible move in LI stock could be tied indirectly to compatriot Alibaba (BABA). Recently, the tech juggernaut released quarterly results that demonstrated its core businesses are thriving. In particular, Alibaba’s premium consumer segment called 88VIP continues to grow, reaching 49 million members.
Fundamentally, the underlying implication is that more high-rolling Chinese consumers are willing to open their wallets. If so, that should be a net positive for the country’s EV sector, thereby bolstering LI stock. What’s more, the Associated Press reported that China’s EV sales expanded last year while sales of gasoline cars plunged.
Still, not everything has gone according to plan. As it relates to the domestic EV sector specifically, the market is reeling from a price war. Due to the Chinese government’s decision to subsidize its EV industry, this action created a robust line of auto manufacturers. However, this fierce competitiveness among companies on relatively equal footing has sparked a race to the bottom.
Moreover, while Chinese consumers may go through cycles of acquisitive behaviors, there have been concerns that the economy overall is slowing. If so, the big bounce in LI stock could be ephemeral — inspiring FOMO-based equity purchases before an eventual correction.
Barchart Screeners Flash a Warning in LI Stock
With thousands upon thousands of publicly traded securities, it’s difficult to intuitively know which ideas to focus on. That’s where Barchart Screeners can help. Think of it as a template for compelling opportunities that meet certain quantifiable parameters. A particularly valuable screener to monitor is RSI Overbought.
As the name suggests, RSI Overbought highlights securities that have risen too far, too fast. Subsequently, they could be due for a pullback. This screener is based on the technical analysis tool called the relative strength indicator. When the RSI goes above the 70 level, the common interpretation is that the trend may reverse downwards.
One of the names that flashed on this warning radar was LI stock. With an RSI reading of 70.57, it barely made the cutoff. However, the overbought signal also inspired me to consider its statistical trend.
Using data going back to its public market debut, a position entered at the beginning of the week has a 51.05% chance of rising by the end of it. Over an eight-week period, this baseline probability declines slightly to 50.86%. Generally speaking, it’s a coin toss.
However, pricing behaviors can change due to unusual fluctuations in the fear-greed continuum. With LI stock, the security is on pace to post a robust double-digit return. Looking back, there have only been 12 times when LI has returned 15% or greater in a one-week period, demonstrating the rarity of extreme-greed events.
Still, the issue is that the odds of success for bullish investors is noticeably lower than a coin toss. For example, in the second week following an extreme-greed event, long odds are only 25%. In the third week, this statistic drops to 8.33%.
Granted, we’re talking about small datasets so distortion is a real problem. Nevertheless, the combination of a technical alert (via Barchart Screeners) and statistical warning suggests that there could be a pragmatically bearish opportunity at hand.
LI Auto Could Revert to the Mean
At time of writing, LI stock is sitting just under the $33 level. Given the psychological and technical importance of the $30 level, a trip back to this point could materialize. Therefore, I would be looking at the 32/30 bear put spread for the options chain expiring March 28.
There’s another reason why the $30 short put strike price is significant. Statistically, the fourth week following an extreme-greed event sees a median loss (assuming the negative scenario) of 10.45%. That would put a downside price target of $29.48. If so, that would be more than enough to trigger the maximum reward at the expiration date.
To be fair, projecting stock prices is hardly an exact science. Should a downside movement materialize earlier, bear put spread buyer may choose to exit the position early, pocketing the max payout minus the remaining time value of the spread. Still, for those who are interested in bearish speculation, the aforementioned spread might be the most sensible.
