<p>Wall Street is in the middle of the carnage, and this week was shockingly negative – set records and not the good guy. The global fear of the spread of coronavirus ignited a panic among investors. In just a few days ago, the shares reached a new record high. And by the end of Thursday, the market had fallen into an official correction at record speed. Sure, many companies feel the heat, but Luckin Coffee (NASDAQ: LK) was hit hard and the LK stock felt burned.
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At its current price, the Luckin share has fallen by 11% from last week’s peaks – which was 16% below the record high level in January. Of course, the LK share is moving fast. And on the way down, it looks like it’s falling into an abyss. But homework matters.
LK Stock has sniffles, but not a deadly disease
Yes, there is pain. But relatively speaking, the Luckin stock held better than Starbucks (NASDAQ: SBUX) during this tough period.
Although both shares are in the red in 2020, the LK share has increased by almost 88% in the last 12 months, while SBUX has only increased by 11%. Overall, this is surprising considering that Luckin operates in China – which was zero for coronavirus.
In addition, retailers generally suffer when there is a fear of infection. But still, the LK stock is resilient – and this proves that it has its fans who are not afraid of adversity.
Maybe it’s because the stock is in the hands of strong investors, as it only recovered after a 35% crash not so long ago. So those who bought the dip then may not be as afraid of such a much milder sale so far.
On January 22, I wrote about the potential for better entry points and the boy turned out to be true. So there is always the potential for big moves from LK shares.
However, this should not scare investors out of it as there is always a reason to worry. In this case, the management got the benefit of the doubt, because in such a short time, Luckin Coffee is already a formidable competitor to Starbucks. Therefore, the question of the timing of the trade will not be critical in the long run.
Relief comes for LK shares
At Thursday’s declines, the LK stock was down large, but then buyers went into effect. The Luckin stock closed far from low, thus leaving a bullish attitude light with a long tail. This may be an emphatic rejection of the declines, as this also happened at the bottom as it set on 31 January.
Nothing is completely certain, but small signs like this leave clues. In addition, Chinese equities have been more resilient as the iShares China Large-Cap ETF (NYSERCA: FXI) and the iShares MSCI Emerging Markets ETF (NYSEARCA: EEM) were both green this week on days when the S&P 500 fell 3%. Perhaps because China led the world with the virus concerns, it is now the first to try to get out of their effects.
Whatever it is, it’s obviously not a normal pricing measure. So today, let’s assess current levels and try to find potential support zones below. Knowing these two things, investors can then determine if upward potential is worth the risk at this point.
Let’s start with the basics. LK shares are not cheap, as they operate at a loss and sell at an astronomical multiple of their sales. At the moment, investors should give it space because they are focused on growth. The management makes brave moves with unmanned kiosk delivery solutions, and who knows what else is next. So in this case, you get what you paid for because in the last six months, the stock has increased by almost 97% while the S&P 500 is fixed.
The LK diagram says a lot about what’s next
Because it is expensive from a traditional point of view, value does not serve as support. That said, we turn to the charts to find clues.
Thursday’s low was just under $ 34, which was support throughout the month. So far it is holding strong, and so the bulls are somewhat comfortable to rely on it. But if it fails, it is likely that LK will test the January situations again – and that would be even stronger support.
Also, if the market-wide panic persists, this second leg lower is more likely than not. Otherwise, I suspect it is not a likely scenario.
Simply put, if someone kept the stock through yesterday’s pain, the time to panic out of it has passed. The next decision would be based on the result of the close price of $ 34. The next three trading days are crucial, and it is best to place them outside.
However, I bet there will be buyers on any incremental sale. Depending on the investor’s time frame, this dip is already a good opportunity to initiate new positions or add some to existing ones. Overall, overall global macroeconomic conditions remain bullish after the effects of the virus fade.
The world is committed to growth
Overall, global governments and their central banks have committed themselves to reflecting growth. So they will throw lots of money at the problems.
In the United States, we have a very favorable Federal Reserve that is expected to lower interest rates sooner rather than later – and more than once. China has already committed billions to compensate for the negative effects of business disruptions, so short-circuiting the markets with new positions from here seems illogical.
Conversely, there is no rush to stack in any warehouse right now. Therefore, it makes sense to either put out the nearest ticks at the expense of missing some upward gains or nipple with small positions. Neither bulls nor bears should be sure of their positions here because there are so many unknowns. The headlines are insanely confusing and probably incorrect.
Overall, Wall Street sells first and then asks questions later. To date, investors have already priced more than $ 2 trillion in market value. This is probably more than enough to cover all the effects on the company’s results. Just as we gather too fast, my opinion is that we fall too fast and somewhere in the middle lies the truth.
Nicolas Chahine is the CEO of SellSpreads.com. At the time of writing, he had no position in any of the above-mentioned securities. Join his chat room for free here.