Here’s How to Trade Tesla Stock After Earnings

Last month’s earnings report was the ultimate buy the rumor, sell the news event for Tesla (NASDAQ:TSLA). Despite announcing robust quarterly numbers, traders rapidly rejected the gap higher, using the overnight jump as a chance to ring the register. Since then, TSLA stock has been dead in the water.

Tesla Super Charging station on Stockdale Hwy and the 5 fwy. Tesla Supercharger stations allow Tesla cars to be fast-charged at the network within an hour.

Source: Sheila Fitzgerald /

Today I want to look at the silver lining of its suddenly sleepy behavior and identify the price level that needs to be broken before buying.

When Correlations Break

I’m always interested in checking out what part of a stock’s behavior is idiosyncratic, and what part is driven by broad market trends. This is much more art than science because there isn’t a set formula.

Instead, it’s a conclusion drawn from comparisons. Since Tesla trades on the Nasdaq Exchange and exhibits high-beta momentum characteristics, the PowerShares QQQ Trust (NASDAQ:QQQ) is arguably the most appropriate benchmark to compare it against.

Consider the accompanying chart overlay showing TSLA stock in candles and QQQ as a line chart.

Tesla (TSLA) stock chart with QQQ overlay showing break in correlation


For the majority of the chart, they have been strongly correlated. Rallies and selloffs in QQQ have been mirrored by Tesla. But not over the past two weeks.

While the Nasdaq has continued powering higher, Tesla has been stuck in the mud. Here are the two key takeaways. First, Tesla is exhibiting relative weakness. Second, its lackluster behavior is not being driven by the overall market. While the weakness persists, I’m not interested in entering new bull trades in TSLA stock. Fortunately, there’s an obvious line in the sand we can use that will signal when momentum is returning.

Let’s take a closer look at the price chart.

TSLA Stock Charts

Tesla (TSLA) weekly stock chart showing powerful uptrend

Source: The thinkorswim® platform from TD Ameritrade

To avoid losing sight of just how historic Tesla’s ascension has been, start with the weekly chart. From the March bottom to last month’s peak, the stock rocketed higher by 412%. It was a mania of the highest order. The pullback we’ve seen has been shallow compared to the ascent. We’re miles away from all the major weekly moving averages and still overbought. From that perspective, pausing or pulling back here is a welcome development.

The daily trend shows just how rapidly volatility has compressed. This morning, TSLA stock is working on its third doji candle in a row. Still, the length of the consolidation has now caused prices to push below the 20-day moving average, which is a short-term sign of weakness.

Again, the shift in momentum was all about the earnings report. We ran headlong into it and sold off afterward.

Tesla (TSLA) daily chart showing consolidation breakout setup

Source: The thinkorswim® platform from TD Ameritrade

While the sideways shimmy might be frustrating adrenaline junkies used to Tesla’s monster moves, it is creating some easy-to-spot levels to trade around moving forward. Instead of buying or selling now, in anticipation of its next move, why not wait for confirmation? Bulls should wait for a break above $1,550 to signal the next up-leg has begun. Bears should wait for a push below $1,420 to signal a deeper correction is developing. Until then, I suggest not forcing trades.

Given the speculative fervor still gripping stocks, and the overall uptrend Tesla stock finds itself in, I suspect the breakout will be higher. But sans confirmation, I wouldn’t bet on it.

Call Flies Offer a Cheap Play

Another side effect of the recent pause is that implied volatility has come back to earth. Options premiums are now much cheaper than they were last month. That said, buying calls or puts on a $1,500 stock is still pricey, so spreads are a must here. Upside call butterflies are my preferred strategy if we can push above $1,550.

The Trade: Buy the Sep $1600/$1700/$1800 call butterfly for around $8.

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