Tesla (NASDAQ:TSLA) has emerged from March’s massacre as a market leader. It required sky-high conviction to sit through the crash, mind you, but those that did have seen their shares almost completely recovered. And the technicals suggest more gains could be in the offing. Let’s take a fresh look at TSLA stock and build an options trade that will deliver big profits if the electric carmaker makes a run for $1,000.
In our normal stroll through top-down analysis, we move from the broad market to sector to individual stock. For most stocks, it’s a straightforward process, but Tesla is a unique case. It’s in a class of its own, making it tricky to find fair comparisons.
For example, it’s an automotive company, but its price behavior couldn’t be any more different than that of Ford (NYSE:F) and General Motors (NYSE:GM). On the broad market front, it boasts a stronger correlation to the Nasdaq than the S&P 500, which makes sense. It moves like a technology stock, and since the Nasdaq is a representation of the tech sector, we can condense the top-down analysis into two charts. First, we’ll look at the Invesco QQQ ETF (NASDAQ:QQQ). Then we’ll do a deep dive into the weekly and daily view of TSLA stock.
TSLA Stock Charts
To say holding TSLA stock in 2020 required intestinal fortitude and guts of steel would be an understatement. Its weekly chart reveals just how otherworldly the volatility has been. The gains have been utterly insane, to be sure, but they were interrupted by a death spiral that saw the shares fall from $968.99 to $350.51 in four weeks. That’s a 64% drawdown and is enough to make even the most loyal fanboys question their commitment. What made it easier, I suppose, is the fact that if you blinked, you missed it. The snapback was almost as quick as the plunge, so shareholders didn’t have to wait years to claw back their profits.
The lower panel in the chart shows the 10-week correlation between Tesla and the Nasdaq. At 0.98, the link has been strong. Perhaps this goes without saying, but the Nasdaq remaining aloft will go a long way to letting TSLA stock continue its drive to record highs. Despite one earnings-driven hiccup along the way, the rebound off the March lows has been incredibly consistent. Provided the stock doesn’t drop on Friday, we will have closed higher for eight straight weekly candles. Along the way, Tesla’s stock has pushed back above the 20-week moving average and is now well-positioned to attack its peak.
Barring a second wave of panic over the novel coronavirus, Tesla’s run could easily carry the stock past $1,000 this year.
The rate of ascent, or momentum, of the daily uptrend has waned in recent weeks. As a result, the RSI is flashing a bearish divergence signal. Thus far, it hasn’t grown into a full-fledged reversal signal. For that, we’d need a support break that hasn’t happened. Keep an eye on the 20-day moving average. It has been a gathering ground for dip buyers who have rescued TSLA from a larger selloff each time it was tested.
To confirm the stock is shaking off the slowing momentum, I like waiting for a breakout over $850 resistance before pulling the trigger on bull trades.
Control Your Cost With Options
If you’re looking for a lower-cost alternative to buying expensive TSLA stock, then options contracts provide a solution. You can build a high reward trade for less than the price of a single share if you want to. Let’s go out three months to allow plenty of time for the stock to make its move.
The Trade: Buy the Aug $900/$920 bull call spread for around $5.
You’re risking $5 to make $15 if TSLA can push above $920 by expiration.
For a free trial to the best trading community on the planet and Tyler’s current home, click here! As of this writing, Tyler didn’t hold positions in any of the aforementioned securities.
