Tesla Inc (NASDAQ:TSLA) notched yet another record closing high on Wednesday. The notorious bear killer climbed to $380.66 by the time trading came to an end. With TSLA stock on the tip of every momentum traders’ tongue, it’s high time we took an in-depth look at one of the hottest stocks of the year.
First, consider a few eye-popping stats:
Tesla stock has gained 78% year-to-date. If this pace continues, Elon Musk’s flagship will end the year up roughly 150%. To state the obvious, this would be a rise of epic proportions. I’d be willing to bet its rate of ascent is unsustainable though.
What’s perhaps most impressive is Tesla’s ability to bounce back from last week’s tech drubbing. In a strong show of resilience and relative strength, TSLA shares have reclaimed all that was lost, and then some.
In contrast, all of its fellow heavy hitters — from Apple Inc. (NASDAQ:AAPL) and Alphabet Inc (NASDAQ:GOOGL) to Amazon.com, Inc. (NASDAQ:AMZN) and Netflix, Inc. (NASDAQ:NFLX) — have failed to reclaim even half of their losses.
While Tesla deserves praise for its stark outperformance, there’s no doubt TSLA stock has become a bit too hot to trot. With its ascent entering the parabolic stage and its volume crescendoing, caution is warranted. Thus far, traders chasing the stock at these lofty levels have experienced little adversity. But I suspect their luck will soon sour.
Tesla’s Stock Chart
Traders count on weekly charts to provide context, to remind them of the bigger picture. Perhaps the most notable pattern was the monster base that developed from 2013 to early 2017.
For years, TSLA stock oscillated in a $100 range between $280 and $180. It was a nasty tug-of-war with whipsaw aplenty. Then, two months ago, buyers finally won the contest. And they’ve since juiced the stock higher by another $100.
Indeed, Tesla stock’s behavior is an enlightening case study of the power of breakout patterns. One of my favorite phrases uttered by veteran chartists is, “the longer the base, the higher in space.” This little rhyme conveys the tendency for stocks breaking above long-term resistance levels to experience monster follow through over the weeks and months ahead.
One of the ways to project a target for a trading range breakout is adding the height of the range (or box) to the breakout level. If we add the height of Tesla’s box ($100) to its breakout point ($280), we arrive at a target of $380 which, incidentally, we just tagged yesterday.
Adding further need for caution is the stock’s overbought status.
Click to Enlarge The Stochastic indicator (showed in lower panel) is bumping up against the upper end of its scale. While it doesn’t guarantee that Tesla retreats or slows in the coming weeks, it certainly increases the chances for such behavior.
The past five episodes of overbought Stochastic signals resulted in a pullback or pause in price. I’ve noted each occurrence in the chart.
Call a Top in TSLA Stock
At a minimum, Tesla’s stretched status should make would-be buyers think twice here. If you simply can’t resist the urge to chase, then be sure to use a stop-loss to allow for a swift exit if gravity finally takes hold.
What I find even more appealing is employing a strategy to capitalize on a drop in Tesla’s stock price, or at least some slowing in its ascent. A bear call spread should do the trick. Sell the July $430/$435 bear call spread for 75 cents or better.
Consider it a bet that the stock will sit below $430 at expiration. If it does, you will capture the 75 cents of reward. The max risk is limited to $4.25 and will be lost if TSLA rises above $435 by expiration.
To minimize the loss, I suggest exiting if the stock breaks above the short strike of $430.
As of this writing, Tyler Craig did not hold a position in any of the aforementioned securities.