Tesla Stock: When Will the Pain End? (TSLA)

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While Tesla Motors Inc (NASDAQ:TSLA) as a company continues to generate headlines, the stock price has been fairly dormant for a month and a half. On Monday, however, Tesla stock fell more than 2% and marginally broke below the tight trading range it had been in since early July.

Beat the Bell: Tesla Motors Inc (TSLA) StockCould this be the beginning of a better mean-reversion drop?

Last week, the U.S. Federal Trade Commission approved Tesla’s bid to acquire SolarCity Corp (NASDAQ:SCTY). The deal was swiftly approved at least in part because the two companies don’t seem to have any obvious overlap.

Although some market participants were surprised by how quickly the merger was approved, the market (i.e., the stock prices of both TSLA and SCTY) did not show any meaningful reaction. At least not until yesterday. Whatever this “delayed” price reaction could have stemmed from is somewhat irrelevant. The fact is Tesla stock has faltered by more than 4% over the past four sessions. And that has come on some pretty dynamic movement.

Tesla Stock Charts

Before looking at the near-term opportunity from this recent selling spree in TSLA stock, let’s look at the bigger picture.

On the multiyear weekly chart, we see that Tesla thus far remains smack-dab in the middle of its sideways range that has been in place since the first half of 2014. Over the past five months, TSLA’s trading range has tightened, and we can thus draw the two black dotted lines shown on this chart. Ultimately, this narrowing trading range will resolve in one direction or another. Which direction is yet to be seen.

This in itself could set up a Tesla stock trade whereby investors buy at-the-money calls and puts simultaneously to profit from a meaningful breakout in either direction. Implied volatility is low, so this trade can be made fairly cheaply. But you have to give it enough time, so buy options with at least a few months left to expiration.

Tesla stock chart weekly
Click to Enlarge

On the daily chart, we can draw a different set of lines. Here, I drew two black parallels that capture TSLA’s trading range since April. From this angle, a nifty technical analyst may deem the pattern a bull flag, which by definition would mean the stock ultimately resolves higher. The other way to look at this pattern is to say that even though a breakout higher eventually is plausible, Tesla stock could first retest the lower end of this range and drop back to $180.

Bottom Line

The signs are mixed right now. Still, options traders could take advantage of low options IV. Consider buying puts or put spreads on Tesla stock. Or even short TSLA for a trade, betting that the multi-day selling spree will see further follow-through buying in coming days, even weeks.

Consider $200 to be the first price target. If and when TSLA stock stages a meaningful bullish reversal, this should serve as a stop-loss signal on the short side and a possible start of a new move higher.

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Article printed from InvestorPlace Media, https://investorplace.com/2016/08/tesla-stock-pain-stop-tsla/.

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