How to Trade Nikola Amid High Volatility and Controversy

Nikola has been volatile over the past week, enjoying both highs and lows. Here's how to trade the stock now.
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My goodness, there’s been a lot of drama surrounding Nikola  (NKLA) - Get Report. Shares have risen about 5% on Wednesday, but that’s nothing compared to the last week or so of trading.

On Sept. 8, shares climbed more than 50% at one point - in a single day! — after it was announced that General Motors  (GM) - Get Report took an 11% stake in the company.

Holding almost 50 million shares, GM agreed to work with the company on manufacturing, among other things. For GM, it would have the option to ride with whatever gains Nikola stock may run up over the years.

Given the headaches Tesla  (TSLA) - Get Report has seen on the production side and the unbelievable surge in its stock price lately, the deal seemed like a potential win for everyone.

However, a few days later, a short report from Hindenburg Research threw cold water on the rally. This has triggered probes into the company from the Securities and Exchange Commission, even as Nikola disputed the reports.

As a result, many investors are leery of the company until the air is cleared - and rightfully so. For those brave enough to trade this name, let’s look at the charts.

Trading Nikola Stock

Daily chart of Nikola stock.

Daily chart of Nikola stock.

On the chart above, the daily action from GM news is highlighted with a purple arrow. Shares struggled with $50 that day, albeit on a tough day for the overall market. However, $50 was resistance the next day too.

A few days later, shares were back below the 20-day and 50-day moving averages, while clinging to the $29 to $30 area as support. This zone has been support since July and has ben significant since May.

On Monday, Nikola gave us a bullish engulfing candle, followed by an inside day. The problem with Nikola is that overnight news can really shift the dynamics of the stock without giving traders time to react.

What bulls need to see is a rotation over Monday’s high, at $28.75. That’s a start. But what they really need to see is a close over $42.50.

That puts the stock over 20-day and 50-day moving averages and fills the gap from last week. In that case, it would open the door back to $50, but without Nikola being cleared of any potential wrongdoing, investors may not have much of a risk appetite for this stock.

On the downside, watch for a break and close below this week’s low, at $28.75. That puts the 200-day moving average in play. If the selling pressure really accelerates, $15 could eventually be on the table.

There are thousands of stocks to trade and of that list, Nikola isn’t the top pick for many investors right now. The gaps are too tricky, the news is too wild and the drama is simply unappealing. As always, do what fits your plan best.