Li Auto Stock Plunges Following Plans For $2B Raise, But Here's Why The Downturn Is Healthy

Zinger Key Points
  • When a company announces a raise, it can have a negative effect on its share price, at least temporarily.
  • Li Auto’s relative strength index indicated overbought conditions, which signaled lower prices were likely to come.

Li Auto, Inc LI was plunging over 6% lower on Tuesday after the Chinese EV manufacturer announced an “at-the-market" offering worth $2 billion.

The company plans to use the funds, which it will raise primarily from U.S. investors along with some non-U.S. investors through selling agents, to develop new autonomous driving technologies, to create new models and for general corporate purposes.

Li currently produces two models, the midsize ONE SUV and the newly released L9, which compete with Nio, Inc NIO and XPeng, Inc XPEV’s electric vehicles in the Chinese market.

When a company announces a raise, it can have a negative effect on its share price, at least temporarily, because the raise results in more shares of the company being issued, which causes dilution. Once the raise is fulfilled, however, investor confidence improves and stocks generally continue back on their previous course.

Considering the current market conditions, with the S&P 500 suffering through a bear cycle, raises become less likely to fill because investors are more wary of whether or not they can benefit from participating in the offering.

With China-based stocks perhaps becoming the outlier and enjoying a bull market recently, it’s possible the general market downturn will have less weight on investors mind. Li Auto, unlike many Chinese stocks and U.S. based companies, was trading at new 52-week highs until recently.

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The Li Auto Chart: Li Auto reversed course into an uptrend on May 10, when the stock formed a bullish double bottom pattern at the $18.83 level, when paired with similar price action the day prior. The most recent higher low in the uptrend was formed on June 16 at the $30.82 level, and the most recent higher high was printed at $41.49 on Friday.

  • So far, Li Auto has retraced about 13% off its all-time high after soaring a whopping 120% higher between May 10 and Friday. Li Auto can retrace a further 14% lower before negating its current uptrend, but if the stock bounces up over the coming days and fails to make a new all-time high before turning downward, a downtrend may be in the cards.
  • On Tuesday, Li Auto was attempted to hold above support at the eight-day exponential moving average, which has been guiding the stock higher since May 26. The stock had become too far detached from the level, however, which indicated a retracement to the downside was likely. Li Auto’s relative strength index had also become overbought, measuring in at about 84%, which also signaled lower prices were likely to come.
  • Li Auto has two gaps below on its chart, with the closest gap falling between $34 and $34.79. Gaps on charts fill about 90% of the time, which makes it likely the stock will trade down into both ranges in the future, but it could be an extended period of time before that happens.
  • If Li Auto closes the trading day near its low-of-day price, the long upper wick could indicate lower prices will come again on Wednesday. If the stock is able to bounce up to close the trading day near flat, Li Auto will print a doji candlestick, which could indicate higher prices are in the cards and that the next higher low may be in.
  • Li Auto has resistance above at $37.19 and $39.35 and support below at $34.79 and $32.86.

See Also: Why Nio Stock Dipped Today

Posted In: MoversTrading Ideas

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