Following the long holiday weekend, stock market bulls are firmly in the driver’s seat. But is now a good time to buy the shares of Tesla (NASDAQ:TSLA)? Let’s take a look at the fundamentals of Tesla and the price chart of TSLA stock. I’ll also suggest a suitable risk-adjusted strategy based on my forecast for the shares.
The week got off to a good start on Wall Street. Shares of the S&P 500 are up 1.6%. Moreover, and for the first time since early March, the index is convincingly above the 62% retracement level of its short-lived, record-breaking and increasingly distant bear-market correction.
Investors are cheering the news from biotech firm Novavax (NASDAQ:NVAX) which recently began human trials on its vaccine for the novel coronavirus.
There’s also renewed optimism about the country’s economic reopening after Americans flocked to nonessential businesses and beaches over the Memorial Day holiday without any major problems surfacing.
Yet amid the rally of the stock market, the shares of electric-vehicle manufacturer Tesla have not risen much this week. Could investors’ enthusiasm about the economy and Elon Musk’s manned SpaceX launch, which should be good PR for Tesla, be taking a back seat to the threats facing the automaker? It’s possible.
Automobiles are expensive. And it’s going to remain tough for many consumers to take on expensive obligations in the near-term as the labor market struggles against the backdrop of the coronavirus. That’s one challenge Tesla could be facing.
The complexity of the global auto supply chain is another potential issue. Amid ongoing Covid-19 challenges in a supply hub like Mexico and other regions, arguably investors could be steering clear of Tesla in favor of stocks whose businesses are less affected by the virus.
The Daily Chart of TSLA Stock
Source: Charts by TradingView
Given Tesla’s demonstrated relative strength since the market bottomed in March, the shares deserve the benefit of the doubt.
Technically, Tesla remains in a tight daily chart consolidation stationed around the 76% retracement level of a three-month corrective base.
That’s a bullish development, but I wouldn’t buy the stock yet. I recommend buying the shares when they have momentum rather than trying to buy them on weakness.
Specifically, I think Tesla needs to close above $855 before investors should consider buying the shares. By waiting until that point, investors will clear pattern congestion. Further, a close above $855 would be Tesla’s best finish since late February. A buy signal should also be accompanied by stochastics turning higher or ideally a bullish crossover.
If those conditions are met, I’d recommend buying a bull call spread that would leave investors very well- positioned to take advantage of an improving share price. One favored combination is the July $900 / $1000 vertical spread. Buying those options with the stock in the vicinity of $855 will result in risk of less than 4% for investors.
The bottom line is that, in the event that Tesla rallies above $855 but doesn’t rise further, the extent of the loss of those who use the strategy is the cost of the spread. That’s a nice guarantee.
If, however, the shares do move higher with some authority, a 100% return can be generated if the shares approach their all-time high reached in early February. And if Tesla can motor to new highs, gains in excess of 225% are possible.
Investment accounts under Christopher Tyler’s management do not currently own positions in any securities mentioned in this article. The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional options-based strategies and related musings, follow Chris on Twitter @Options_CAT and StockTwits.
