Nio, Inc (NYSE:NIO) surged almost 8% higher on Monday morning before being pressured down by the general market, which saw the S&P 500 struggling to trade flat to Friday’s closing price.
The morning surge took place after BofA Securities analyst Ming Hsun Lee upgraded the stock from Neutral to a Buy rating and bumped the price target from $25 to $26. Lee expects the China-based electric vehicle manufacturer to see stronger sales during the third and fourth quarters of 2022, with improvements in its supply chain likely to happen over the coming weeks.
A downtrend occurs when a stock consistently makes a series of lower lows and lower highs on the chart.
The lower lows indicate the bears are in control, while the intermittent lower highs indicate consolidation periods.
Traders can use moving averages to help identify a downtrend, with descending lower timeframe moving averages (such as the eight-day or 21-day exponential moving averages) indicating the stock is in a steep shorter-term downtrend and descending longer-term moving averages (such as the 200-day simple moving average) indicating a long-term downtrend.
A stock often signals when the lower low is in by printing a reversal candlestick such as a doji, bullish engulfing or hammer candlestick. Likewise, the lower high could be signaled when a doji, gravestone or dragonfly candlestick is printed. Moreover, the lower lows and lower highs often take place at resistance and support levels.
In a downtrend the "trend is your friend" until it’s not and in a downtrend, there are ways for both bullish and bearish traders to participate in the stock:
- Bearish traders who are already holding a position in a stock can feel confident the downtrend will continue unless the stock makes a higher high. Traders looking to take a position in a stock trading in a downtrend can usually find the safest entry on the lower high.
- Bullish traders can enter the trade on the lower low and exit on the lower high. These traders can also enter when the downtrend breaks and the stock makes a higher high, indicating a reversal into an uptrend may be in the cards.
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The Nio Chart: Despite trading higher on Monday, Nio remains in a downtrend, with the most recent lower low printed on May 12 at $11.67 and the most recent confirmed lower high formed at the $18.22 mark on May 4. On Monday, Nio was working to print a doji candlestick on the daily chart, which could indicate the next lower high is printing and the stock will retrace on Tuesday.
- If the stock can close near its high-of-day price, however, the lower wick would suggest the stock will trade higher again on Tuesday. If Nio falls to close the day near its low-of-day price, it will print a shooting star candlestick, which could indicate lower prices will come.
- Nio regained the eight-day exponential moving average (EMA) as support on Monday, which is a positive sign for the bulls. If Nio trades higher on Tuesday and is able to regain the 21-day EMA as support and hold above the level for a period of time, the eight-day EMA will cross above the 21-day, which would give more conservative bullish traders additional confidence.
- Nio has resistance above at $16.75 and $20.25 and support below at $14.31 and $11.38.
