Interactive Investor

Chart of the week: a popular tech stock playing catch-up

4th January 2022 12:16

John Burford from interactive investor

There’s solid momentum behind the electric vehicles sector, and this technical analyst believes the laggards will do a lot of catching up this year. The current price could mark a major low prior to a lengthy bull phase.

Lagging EV shares are due a major boost  

I am somewhat spoiled for choice this morning – everything in London seems to be gapping higher after the festive break. I have abandoned my bearish stance on the FTSE in light of the sharp surge in Tesla (NASDAQ:TSLA) sales last month – and the surge in US Treasury and UK gilt yields. A rising bond yield implies a stronger economy ahead. One fly in this ointment will be the rise in short-term rates that almost certainly lie ahead.

Rising bond yields will aid the somewhat battered banking and finance sectors. And, with mortgage demand still high, bank earnings should improve this year. Also, it appears the effects of the pandemic will diminish into the year.

So, today I am selecting one of the picks in my October Electric Vehicle (EV) Report – NIO (NYSE:NIO). Recall that this is an EV company based in China and that it has just reported a large increase in deliveries. And, in another boost to the EV sector, the market-leading Tesla also reported much larger-than-expected sales last month.

But the recent fortunes of the two companies cannot be more different. While Tesla remains firmly in a solid uptrend and is currently trading near its all-time high, NIO has been in a major 60% correction off its peak since last January. So, with solid momentum behind EV sales as revealed by the latest data, NIO has the capacity to well outpace Tesla in terms of per cent appreciation.

In fact, the legacy Ford Motor Co (NYSE:F), which is also a major player in EV, is making new highs. There is now solid momentum behind the EV sector, and I believe the laggards, such as NIO, will do a lot of catching up this year.

Past performance is not a guide to future performance.

And the chart certainly backs up this assessment. I was early in calling the low in October as the shares had one more dip to complete the correction to the $27.50 low set on 29 December. So, will the new year mark a major low prior to a lengthy bull phase?

​​​​​​On the above chart, I see a lovely, bullish, down-sloping diagonal that has been forming for a year. Provided the low can hold, as appears likely, I see a move up to test the upper wedge line at the $40 region shortly.

A sharp break above that level would help propel the shares to my next target at around $55. Any break below the low would be a problem for this view.

Naturally, there are many slips 'tween cup and lip and I see the supply (and price) issues around lithium remaining a major worry that could hamper deliveries. Also, developments in the alternative hydrogen fuel vehicles have gone quiet recently. Does this mean lithium is winning that battle?

John Burford is the author of the definitive text on his trading method, Tramline Trading. He is also a freelance contributor and not a direct employee of interactive investor.

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