Tesla (NASDAQ:TSLA) took the world by storm in 2020. With the books now closed, its official gain for the year is a jaw-dropping 743%.
Historic? Indeed. Likely to repeat in 2021? Heaven’s no. At least, not at that magnitude.
Luckily, we don’t need another barnburner to create opportunity. There will be plenty of lucrative Tesla stock trades to come.
Tesla is simply too good of a trading vehicle not to serve up a handful of pretty patterns for chart watchers to pounce on. Besides, the number of traders who buy a stock at the beginning of the year and hold it through December are tiny. Most take profits or get shaken out during corrections along the way. This reality makes the practice of forecasting year-end targets more of an intellectual exercise than a practical one.
Two Reasons You Shouldn’t Bet on a Repeat
Let’s start with the most obvious reason why 2021 will be unable to keep pace with 2020 on the gains front: Tesla’s closing price on December 31 of $705.67 combines with its total shares outstanding of 947,900,730 to create a market capitalization of approximately $669 billion.
We don’t even need to come close to another 743% gain in 2021 to illustrate the futility of such an outlandish increase. If the electric vehicle juggernaut were to even triple from here, that would place its market cap at a whopping $2 trillion — bringing it just shy of Apple (NASDAQ:AAPL) and the coveted title of the most valuable company on the planet.
Say what you will about the genius of Elon Musk and his brainchild, but there’s no way the company rockets its way to the top. Not this fast. And certainly not given the current state of its revenue and earnings numbers.
A second reason Tesla is extremely likely to cool in 2021 is that it lacks one of the biggest catalysts that propelled it in 2020 — being added to the S&P 500 Index. After all, it can’t be added twice.
To be clear, it’s not the direction of the stock’s trend that I’m arguing against. That is undoubtedly up and makes me a bull alongside anyone with their eyes open. Though I suspect even those investors would be able to follow the crowd piling into Tesla shares by the amount of noise and cheers surrounding the fanboys.
Now that we’ve established why the pace is unsustainable let’s take a closer look at the chart to understand why you’d be crazy to go bearish right now.
Tesla Stock Chart & Trade
Tesla’s stock chart is a thing of beauty. It’s been volatile yes, but ever since the March low, the price action has been very constructive. There’ve been very few support breaks and shakeouts along the way. Furthermore, just about every single breakout has seen upside follow-through and quick profits to traders.
I could also add the old charting maxims that a trend in motion stays in motion, and that the trend is your friend. Prices are currently perched at a record high above all major moving averages. There’s not a whiff of resistance in sight, and the worst thing we can say about the technical posture is that Tesla stock is overbought. But that’s never a good reason to short.
If you want to bet on further gains into January, but don’t want to fork out $700 per share, then bull call spreads are worth a shot.
The Trade: Buy the Feb. $750/$760 bull call vertical for around $4. The max loss is $4, and the max gain is $6.
On the date of publication, Tyler Craig held a LONG position in AAPL.
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