Tesla Inc (NASDAQ:TSLA) initially rose after hours following an earnings report that raised as many questions as it answered. However, TSLA stock then succumbed to selling pressures and ultimately fell some 7% across the week.
A Goldman Sachs downgrade yesterday added another 5% to the recent slide to close at $246.23, with shares of Tesla stock now 12% off the recent highs at the $280 level.
With the faith in TSLA stock now broken, the $235 level looms as an important area to hold.
Certainly the ongoing questions surrounding Tesla continue to remain unanswered. The most pertinent question involves the likelihood of an additional capital raise for Tesla, especially on the heels of the SolarCity acquisition and the ever alarming free cash flow burn rate. While TSLA appears to have more than adequate liquidity in the short-term, eventually, a dilutive secondary offering appears to be almost virtually certain.
Tesla also faces uncertainty surrounding the critical Model 3 launch. Yes, Tesla management is fully confident of their projections … but many analysts are expressing doubts. Certainly, TSLA’s past history of Tesla — over-promising and under-delivering — likely weighed on analyst opinion. James Brumley does a superb job of drilling down deeply on some of these very notions.
While faith in Tesla may be difficult to gauge, it is not all that difficult to see from a technical perspective.
Tesla Stock Charts
In my most recent post on TSLA stock, I pointed to an over-abundance of faith in the company at the $270 level and suggested a short-term bearish trade, which proved to be prescient. With shares now approaching the $235 support level, my view on Tesla is decidedly less bearish.
Why? Because price does matter.
Using a somewhat simplistic 9-day Relative Strength Index (RSI) methodology has proven to be quite effective in identifying short-term tops and bottoms in Tesla stock. Overbought levels in blue correspond to tops in the stocks and oversold areas in red are indicative of short-term lows, as seen in the chart above.
With a current RSI reading of just 32, TSLA is fast approaching an oversold level.
TSLA stock also bounced off the 50-day moving average at $241, reversing the downtrend and closing well off the lows. This type of reversal many times bodes well in the short run, especially with intermediate support looming at the $235 area.
So while I’m decidedly not a Tesla bull for a long-term investment, as a trader, I’ve switched to a more bullish short-term posture given the recent drubbing in shares. To position for a bounce — or at worst, a consolidation — a bull put spread makes sense.
How to Trade TSLA Stock Here
Buy March $227.50 puts and sell March $230 puts for a 50 cents net credit.
These are the traditional monthly options on TSLA stock that expire March 17. The maximum gain is $50 per spread with maximum risk of $200 per spread. Return on risk is 25%.
The short $230 strike provides a 6.5% downside cushion to the $246.23 closing price of Tesla shares and is also well below the $235 support level.
As of this writing, Tim Biggam did not hold a position in any of the aforementioned securities.
