Wall Street was in a predictably agreeable buying mood Tuesday, but Tesla (NASDAQ:TSLA) was a standout with TSLA stock rallying 9.35% compared to a gain of 2.51% in the large-cap, tech-heavy Nasdaq. Moreover, the strong outperformance and outsized profits for buyers may just be getting started.
Dead cat bounce. Rally attempt. Bargain hunting. No matter what you call the start to an abbreviated trading week for the Nasdaq, it happened with nary a headline to drive the price action. Not that any headline was needed with new bear market lows in the wake of the Federal Reserve’s tricky interest rate hike as regulators attempt to tackle inflation while avoiding a recession.
But for those wanting headlines to drive the price action, Tesla did bullishly deliver on that front and investors reacted favorably. Today, let’s look at what’s behind the relative and absolute price strength and how bullish intermediate-term buyers can have the inside track on more secure profits going forward.
Why TSLA Stock Motored Higher
Amid ongoing Twitter (NYSE:TWTR) concerns tied to Elon Musk’s proposed social media buyout and its bearish implications on Tesla, last week’s $258 billion Dogecoin (CCC:DOGE-USD) “racketeering scheme” lawsuit against the Tesla CEO, or former employees filing suit over Tesla violating federal law with its mass layoff decision, TSLA stock still managed to serve some good news to investors a the start of the workweek.
Speaking at a Bloomberg conference overseas, Tesla’s brazen CEO offered investors upbeat dialogue regarding electric vehicle (EV) demand for Tesla. While much fuss has been made regarding at-risk consumers and buyers balking at Tesla price increases, Musk assured investors that that’s simply not the case anytime soon based on what he’s seeing.
Musk noted that raw materials and production amid Covid-19 and the Ukraine crisis remain constraints for Tesla. However, he emphasized extremely strong demand backed by a long waiting list in the face of both electric vehicle competition, as well as the higher price for the company’s ever-popular EVs.
Musk also provided some relief regarding the size of those pink slips. He clarified that the layoffs would reduce salaried employees by 10% over the next few months. However, combined with Tesla’s increased hourly hiring, only about 3.5% of the company’s workforce is affected, which is “not super material” in his view. Further, he expects a higher head count for both sets of employees by 2023.
Bullish Price Chart Can Drive TSLA Stock
Source: Charts by TradingView
If TSLA stock investors are looking to buy growth at a compelling valuation, don’t worry, you haven’t missed your chance yet. Tuesday’s solid bid could turn into a starting point for a meaningful, longer-term bottom. As it stands though, those buyers have put themselves in a much riskier position than necessary.
Technically, as Tesla stock’s weekly chart reveals, this week’s budding rally has reaffirmed an existing, but tenuous double bottom variation, after shares pulled back into the formation over the past couple weeks. Tuesday’s entry provides buyers with the opportunity to purchase TSLA stock much closer to the pattern’s low, but it’s not without risks, and right now, more prone to failure on two counts.
For one, stochastics remains bearishly aligned in oversold territory. That needs to change. Also, Tuesday’s entry has a market-backed “rally attempt” in place, but a much more historically critical follow-through day (FTD) to assist in longer-term buy decisions is still missing in action.
The fact is no modern bull market has occurred without that powerful thrust session in place. And while having a FTD is no guarantee of a lasting bullish cycle, it’s fair to say that a stock of TSLA’s caliber is much less likely to defy the market and motor strongly higher with any staying power if one fails to materialize.
The Key to Buying TSLA Stock
The good news is a more secure purchase in Tesla could happen as soon as Wednesday. If a powerful session marked by stronger than average price gains on heavier than normal volume was to occur, a FTD would be confirmed. Also, another strong session in TSLA stock is likely enough to produce a bullish stochastics crossover.
Should those conditions be met, I’d also recommend an actively managed and fully hedged collar strategy for TSLA stock before investors go and rush in to buy Tesla.
By combining a protective put to hedge downside risk, which obviously doesn’t just entirely disappear despite supportive technicals, and financing that insurance with an out-of-the-money short call, the investor has created a synthetic bull call spread.
But the collar can be so much more as an investment tool than a limited risk strategy also typically needing shares to go higher to profit, when actively managed positive returns are even possible at much lower levels than the initial purchase price. And accumulating on weakness becomes much easier when looking at much larger existing and unhedged stock losses.
On the date of publication, Chris Tyler did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.