Tesla Motors Inc (NASDAQ:TSLA) has had a pretty nice run over the past couple of months, climbing some 30% since its late March bottom to put itself back in the black by roughly 10% year-to-date.
You can thank a host of positive headlines for the turnaround in Tesla stock, among them:
- The Tesla first-quarter earnings report just about a week ago that showed a better-than-expected loss and Street-beating revenues.
- The announcement of the Tesla Powerwall and Powerpack — unsexy but nonetheless potentially lucrative batteries for the home and workplace, respectively, that put Tesla into the energy storage business.
- Some positive developments on the direct-sales front, including a green light in Maryland and a favorable FTC ruling in Michigan.
All very good, and I remain a long-term bull in TSLA. But …
Why Tesla Stock Could Be in for a Bumpy Ride
While things look fantastic from a news flow perspective, there are a number of warning signs budding up on the Tesla stock chart that have me feeling a little defensive.
In short, depending on your perspective, now could be a good time to make a bearish play on TSLA, or if you hold, it could be time to buy some short-term protection.
Tesla’s run over the past few weeks, while fun for the bulls, has left TSLA somewhat overextended and bumping up against some serious potential technical resistance. Among the warning signs:
- Tesla’s move up to the $243 area has brought shares into their 61.8% Fibonacci retracement from its September highs to its April lows.
- The Relative Strength Index (RSI) has climbed above the 70 area again. By this measure, Tesla stock isn’t wildly overbought, but its last foray into these levels did coincide with a roughly 7% breather back in late April.
- Moving Average Convergence Divergence (MACD) is also off to the races, another signal that the buying in Tesla stock is potentially overdone right now.
- Tesla’s shorter-term (21-day) moving average — which, after crossing through the 50-day MA sparked a steep jump in shares — is now butting heads with TSLA’s 200-day MA.
To be clear, none of these are dark, ominous signs of a collapse in Tesla shares, but they do indicate that some healthy consolidation could be on the way.
If that turns out to be the case, you could take advantage via put options — whether you just want to make an aggressive short-term bet, or if you’re long TSLA and want to buy some protection for your recent gains.
If you think Tesla stock is due for a quick correction — say, along the lines of the 7% correction Tesla saw a couple weeks ago — you could buy the May 22 $237.5 puts for $2.85. Breakeven for this trade would be $234.65, or a 3.5% decline from here. A 7% decline, which would put TSLA right up against support at its 200-day MA around $227, would provide a 270% return on your initial purchase.
If you want to buy some protection, it’s not cheap, but TSLA Jun $235 monthlies can be bought for $6.75. Breakeven here would be $228.25, giving you a little extra protection should TSLA find its way down to (or even break below) its 200-day MA.
Bottom Line
Again, I see any short-term weakness in Tesla stock as being just that — short-term. The news flow for Tesla has been overwhelmingly positive of late, so barring some massively negative surprise, there’s no reason for the bottom to just fall out.
Kyle Woodley is the Managing Editor of InvestorPlace.com. As of this writing, he owned shares of TSLA. Follow him on Twitter at @KyleWoodley.
