Nikola (NKLA) Buyers Trapped in Overnight Reversal

Nikola Corporation (NKLA) stock was up to its old tricks overnight, dropping more than 15% after Tuesday's 17% rally lifted the controversial hydrogen vehicle manufacturer to a two-month high. The stock had rallied nearly 100% between Nov. 10 and last night's closing bell, joining a torrid advance all across the electric vehicle (EV) space. Even so, the stock is still trading more than 60 points under June's blow-off top, which occurred right after the Phoenix-based company completed an acquisition and took the "NKLA" ticker.

Key Takeaways

  • Nikola stock has exhibited extreme volatility since June, with violent rallies and selloffs.
  • The stock reversed overnight, catching Monday buyers in a bull trap.
  • Price action has regained some broken technical levels, increasing the odds for a rally to $50.
  • General Motors Company (GM) has the option to walk away from a highly touted partnership next week.

Nikola stock dropped like a rock in June after Citron Research posted a cautious report and plummeted once again just two weeks after completing a 54 million-share secondary offering. Questions arose at that time about a December 2016 presentation that made allegedly exaggerated claims about the Nikola One prototype truck, with a video featuring an inoperable vehicle with missing components, indicating that it never drove under its own power.

The selloff picked up momentum in July after the company filed for a sale of up to a quarter billion shares by "certain selling shareholders," dropping more than 20% in a single session. A one-day wonder rally erupted after the announcement of a strategic partnership with General Motors in September, quickly extinguished when the SEC opened an investigation into fraud allegations. Chair and founder Trevor Milton was forced to resign two weeks later, adding to a melodrama that just won't end.

GM took a giant step back from the developing partnership after the whirlwind but is continuing discussions. However, Nikola CEO Mark Russell prompted an overnight selloff when he told CNBC that both sides can "walk away" if a deal isn't completed by next week. It isn't clear at this time what's going to happen next, given shaken investor confidence, but that won't stop traders from playing the violent and potentially profitable price swings.

A blow-off top is a chart pattern that shows a steep and rapid increase in a security's price and trading volume followed by a steep and rapid drop in price usually on significant or high volume as well. The rapid changes indicated by a blow-off top, also called a blow-off move or exhaustion move, can be the result of actual news or pure speculation.

Nikola Daily Chart (2020)

Chart showing the share price performance of Nikola Corporation (NKLA)

The stock rallied into the mid-$30s in May and pulled back, settling at support in the low $20s one week later. It returned to the high in June and broke out, entering a momentum-fueled advance that added nearly 60 points in just two sessions. It then fell 40 points in three sessions, highlighting extreme volatility that has continued through the fourth quarter. Initial support in the low $50s held into a July downdraft that also completed a double top breakdown.

Price action settled in the upper $20s at the start of August, yielding a modest uptick that culminated with the GM news in September. Nikola stock failed support at the 50-day exponential moving average (EMA) at that time, ahead of continued downside that relinquished about 90% of the total upside into late September. It tested the low about two weeks ago and turned sharply higher, remounting the broken .786 Fibonacci rally retracement level on Monday.

The on-balance volume (OBV) accumulation-distribution indicator reveals a potent combination of bottom fishing and short selling, lifting to an all-time high this week. Price action has also remounted the broken 50- and 200-day EMAs, establishing new support that is getting tested on Wednesday morning. Another decline through the mid-$20s would be extremely bearish in this scenario, setting up the potential for new lows. However, buying cycles are realigning once again, with potential upside into the September peak near $50.

A bull trap is a false signal, referring to a declining trend in a stock, index, or other security that reverses after a convincing rally and breaks a prior support level. The move "traps" traders or investors that acted on the buy signal and generates losses on resulting long positions. 

The Bottom Line

Nikola stock has reversed violently in a classic bull trap after lifting to a two-month high on Tuesday.

Disclosure: The author held no positions in the aforementioned securities at the time of publication.

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