There is definitely no doubt that electric and autonomous vehicles are the future. With Tesla’s stock rising more than a 1000% in just past year alone, investors have been on a hunt to find the next Tesla resulting in an electric vehicle mania in early 2020. Too many new electric vehicle companies have emerged in the past few years and investors have been trying to distinguish the legitimate from the purely speculative names.
Too much opinion has been shared on whether the unprecedented rise in these car companies’ stocks is premature and if their valuations are justified. Some are still skeptical about the rise in Tesla’s stock even after a decade of outperformance and are still calling for a crash.
As a stock market technician, I have learnt to always pay more attention to price action when it comes to making trading decisions. Price action is real and is not open to too much interpretation, that’s if you know how to read it correctly. On the other hand, focusing on fundamental analysis alone is purely subjective and open to the trader’s interpretation. Therefore, I have decided to focus on comparing the price action of Tesla with NIO to determine which company is in a better position to outperform the other in 2021.
As I stated earlier, Tesla’s stock rose more than a 1000% after the post pandemic crash in early 2021 and share prices have been consolidating for the past 6 months. So what’s next for this behemoth electric vehicle manufacturer?
As you can see on the weekly chart above, the stock has been consolidating in a potential continuation pattern after the sharp uptrend in 2020. With the overall indices breaking out to all-time highs, it’s definitely tempting to assume that the stock will break out of this recent continuation pattern and eventually print new highs.
An average long-term investor might initiate a long position here hoping that a breakout will take place near-term however, that would be purely speculation.
On the other hand, an experienced trader knows that not every consolidation zone is a continuation pattern, and such patterns can often last longer than you can imagine. It’s important to note that volume kept declining along the uptrend, indicating that less investors were interested to participate in this stock as share prices got more expensive. This is not to say that you should be expecting a trend reversal, but the stock has been consolidating for the past few months and you don’t want to get caught in this trading range for a long period of time, stocks can often remain irrational longer that you can remain solvent.
Now, let’s examine Tesla’s monthly chart to determine how long this recent consolidation zone can potentially last for.
As you can see on the chart above, share prices consolidated for more than 5 years from 2014 to 2020 after a huge run in 2013 and it’s quite possible that share prices experience a similar scenario after the huge run that the stock had in 2020. As I stated earlier, volume kept declining along the uptrend in 2020 showing that less investors were interested to participate in the rally as share prices became more expensive.
In addition, momentum indicators have also been going down confirming the obvious fact that the stock has been losing momentum.
Consequently, I recommend that you wait for a full break out of this recent consolidation zone accompanied with an upsurge in volume before initiating a new long position. You need to make sure that stock can get above the $900 level and hold before concluding that this recent continuation pattern has resolved to the upside and a new uptrend is emerging.
Similarly, NIO had an amazing run in 2020 with share prices rising more than 3000%. The stock finally started pulling back and consolidating in 2021. So, can this much smaller electric vehicle manufacturer outperform Tesla going forward?
As you can see on the weekly chart above, NIO’s share prices rose more than 3000% from $2/share to $60/share after the post pandemic crash.
The stock finally pulled back to $30/share and started consolidating around that level for some time. A 50% pullback might be considered as too much downside volatility by most conservative investors however, such a pullback is absolutely reasonable and healthy after a 3000% rise in share prices. Buyers finally appeared and it seems like that the stock has been trying to recover in the past two months. With volume picking up and momentum indicators trending higher, the future of this stock is promising to say the least.
In the case of NIO’s stock, the monthly chart does not reveal too much extra information about the price behavior of the stock. However, I decided to include it to show you how it appears that the stock is breaking out once more after the recent pullback and could be establishing a new uptrend here.
Considering that the stock is not too far from its all-time high of $67, I would like to wait until NIO trades above that level accompanied by an upsurge in volume to confirm that this pullback period is fully resolved, and the stock has indeed established a new uptrend.
The future for all smart and electric vehicle manufactures seems bright but as investors we still want to discover the stock with the highest return potential. Tesla might be the leader in the electric vehicle industry and definitely has an edge over NIO when it comes to fundamentals and proven track record. However, after examining the price behavior of these two stocks I have concluded that NIO wins this battle when it comes to momentum and might have a more return potential going forward.
Remember, NIO was only founded in 2014 and there is still a great deal of skepticism surrounding the company and that could potentially mean that there are still a multitude of potential investors waiting on the sidelines!