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Despite Market Correction, Luckin Stock Remains Hot

InvestorPlace logo InvestorPlace 2/28/2020 Nicolas Chahine
Despite Market Correction, LK Stock Remains Hot © Source: Keitma / Shutterstock.com Despite Market Correction, LK Stock Remains Hot

Wall Street is in the middle of the bloodbath, and this week was shockingly negative — setting records, and not the good kind. The global fears from the spread of the coronavirus ignited a panic among investors. Meanwhile, just a few days ago, stocks made a new all-time high. And by the end of Thursday, the market had fallen into an official correction at a record pace. Sure, many companies are feeling the heat, but Luckin Coffee (NASDAQ:LK) was hit hard, and LK stock felt burned.

Despite Market Correction, LK Stock Remains Hot © Provided by InvestorPlace Despite Market Correction, LK Stock Remains Hot

At its current price, Luckin stock has fallen 11% from last week’s highs — which was 16% below the all-time high set in January. So clearly, LK stock moves fast. And on the way down it looks, like it’s falling into an abyss. However, homework matters.

LK Stock Has the Sniffles, but Not a Deadly Disease

Yes, there is pain. But relatively speaking, Luckin stock held up better than Starbucks (NASDAQ:SBUX) through this tough period.

Although both stocks are in the red in 2020, LK stock is up nearly 88% the past 12 months while SBUX has gained just 11%. All things considered, this is surprising given that Luckin operates in China — which was ground zero for the coronavirus.

Moreover, retail in general suffers when there is fear of infection. But, nevertheless, 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 just recovered from a 35% crash not too long ago. So those who bought the dip then may not be as scared of a this much milder selloff so far.

On Jan. 22, I wrote about the potential of better entry points and boy did that turn out to be true. So there is always the potential of big moves from LK stock.

This, however, should not scare investors out of it because there is always a reason to worry. In this case, management earned the benefit of the doubt because in such a short period of time, Luckin Coffee is already a formidable competitor to Starbucks. Therefore, over the long term, the matter of trade timing is not going to be critical.

Relief Is Coming for LK Stock

At the Thursday lows, LK stock was was down big, but then buyers stepped in in force. Luckin stock closed well off the lows, thereby leaving a bullish posture candle with a long tail. This could be an emphatic rejection of the lows, as this also happened on the bottom it set on Jan. 31st.

Nothing is fully certain, but small signs like this leave clues. Moreover, Chinese stocks have been more resilient like the iShares China Large-Cap ETF (NYSERCA:FXI) and iShares MSCI Emerging Markets ETF (NYSEARCA:EEM) were both green this week on days that the S&P 500 was down 3%. Maybe since China led the world with the virus worries, it is now the first trying to emerge from their effects.

Whatever it is, clearly this is not normal price action. So today, let’s assess current levels and try to find potential support zones below. Knowing those two things, the investors can then decide whether the upside potential is worth the risk at this point.

Let’s start with the fundamentals. LK stock is not cheap, as it operates at a loss and sells at an astronomical multiple of its sales. For now, investors should give it leeway because they are focused on growth. Management is making bold 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 is up almost 97% while the S&P 500 is mired flat.

The LK Chart Says a Lot About What’s Next

Since it is expensive from the traditional sense, value will not act as support. That said, we turn to the charts to find the clues.

Thursday’s low was just under $34, which was support for all month long. So far, it’s holding strong, and so the bulls are somewhat comfortable relying on it. But if it fails, then it is likely that LK retests the January lows — and those would be even stronger support.

Moreover, if the market-wide panic persists, then this second leg lower is more likely than not. Otherwise, I suspect it’s not a likely scenario.

Simply put, if someone held the stock through yesterday pain, then the time to panic out of it has passed. The next decision would be based on the outcome of the near price of $34. The next three trading days are crucial, and it’s best to sit them out.

However, I bet there will be buyers on any incremental selling. Depending on investor time frames, this dip is already a good opportunity to initiate new positions or add some to current ones. Overall, the overall global macroeconomic conditions are still bullish after the effects of this virus fade.

The World Is Committed To Growth

Collectively, the global governments and their central banks are committed to reflating growth. So they will throw a ton of money at the problems.

In the U.S., we have a very favorable Federal Reserve that is expected to cut rates sooner rather than later — and more than once. China has already committed billions to offset the negative effects of the business disruptions, so shorting the markets with new positions from here seems illogical.

Conversely, there is no rush into piling into any stock at this point. Therefore, it makes sense to either sit out the next few ticks at the expense of missing out on a few upside profits, or nibble with small positions. Neither bulls nor bears should be confident in their positions here because there is so many unknowns. The headlines are insanely confusing, and most likely inaccurate.

Overall, Wall Street sells first, and then asks questions later. So far, investors already priced out more than $2 trillion dollars in market capitalization. This is likely more than enough to cover all the effects to the company bottom lines. Just like we rally too fast, my opinion is that we’re falling too fast and somewhere in the middle lies the truth.

Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. Join his live chat room for free here.

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