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Chart Of The Day: The Bullish Case For EV Manufacturer, Lucid

Published 07/18/2022, 09:31 AM
Updated 07/09/2023, 06:31 AM

Investors have given up on US electric vehicle manufacturer, Lucid (NASDAQ:LCID).

Fundamentally, the stock's valuation may seem expensive relative to other EV companies. But contrarians may think this is precisely the time to buy.

The valuation is technically-based, but the risk is low compared to the potential reward.

Let's examine the basics, such as the trend.

LCID Daily

The stock's price has been ranging, increasing troughs, while the peaks stayed relatively flat. This trading pattern developed an Ascending Triangle. That's a structure in which buyers assume even higher risks while the sellers are only willing to maintain the same risk. That combination demonstrates that demand is outpacing supply. If and when the market absorbs supply, buyers will be faced with the choice to keep increasing their risk by seeking more discerning sellers, who are only willing to part with their stocks at higher levels than the triangle. If that happens, trading will presumably enter a chain reaction, propelling prices higher yet.

The initial push is expected to be boosted by short covers and triggered long positions. Once those play out, there is a chance for a Return Move, which retests ongoing demand, referred to as "support" by the pattern. The odds are in favor that, at this point, the market will have decided that the stock should go higher, creating a self-fulfilling prophecy.

Also, as a bottom, this will prove an accumulation pattern, suggesting that at least "the smart money", if not "informed money", has quietly been buying the stock.

Now, let's take a step back and look at the big picture to appreciate better how low the price is.

LCID Weekly

The price is at the lowest level since Lucid went public. We can see repeated support at this level.

The price has created a base above the 50 DMA, as it presumably runs up momentum to break through the 100 DMA that has been reinforcing the triangle top. The 200 DMA is just above the pattern's simplified target of a near-$7 upside from under $21.

Trading Strategies

Conservative traders should wait for the price to provide the upside breakout; employ a minimum 3%, three-day (preferably to include a weekend) filter in which the price remains above the pattern to avoid a bull trap before risking a long position.

Moderate traders would wait for the same price move, with at least a 2%, two-day filter. They may wait for a return move to reduce exposure, if not confirm the trend.

Aggressive traders could risk a long position after a 1% breakout on a closing basis.

Trade Sample

  • Entry: $21
  • Stop-Loss: $20
  • Risk: $1
  • Target: $26
  • Reward: $5
  • Risk-Reward Ratio: 1:5

Disclosure: I have no positions in any stocks or instruments mentioned in the article.

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