Just the mention of Tesla Motors (TSLA) sets a trader’s heart beating faster. The company and its stock price have become a worldwide phenomenon seemingly overnight. But the news has not been all rosy — on Oct. 1 a Tesla Model S car collided with an object on the road and caught on fire, and the video of the fire (of course there’s a video) went viral.
The stock fell just about 10% over the past two days as a result of concerns over the Model S fire — what to do now depends on your time horizon.
Last week I discussed the momentum behind TSLA stock and argued that fighting the trend simply isn’t a winning strategy … until the stock reverses its major upswing.
From the beginning of the year to the recent top on Oct. 1, TSLA rallied around 470% in a straight shot to the moon. Eventually the stock will slip into a substantial mean-reversion move lower; the question is when. Is the news of the car fire enough to cause a bigger selloff over the coming weeks? Obviously no one knows quite yet, but traders and investors can still draw up a battle plan by way of reference price areas on the stock’s chart.
Reference levels of where one should be proved wrong need to be time-frame dependent. For investors with medium- to longer-term time frames in the stock, the selling so far this week isn’t much to worry about. While profit-taking along the way is rarely a bad idea, the stock hasn’t seen its 50-day moving average since mid-July — and a retest of it, currently around the $160 mark, would be nothing of concern. Longer time frames mean longer leashes on stop-loss levels.
The closer-up daily chart of TSLA reveals the trading channel in which the stock has spend most of its time since early June. Furthermore, the lower end of the trading channel is supported by the stock’s 21-day simple moving average (yellow line), which has acted particularly well as support. Yesterday TSLA closed marginally below its 21-day moving average while holding within its uptrending channel.
Quicker traders may want to raise a first cautionary flag at this juncture — but the uptrend is still intact. You can lighten up long positions, sure, but it’s too early to start looking for significant downside from here.
Serge Berger is the head trader and investment strategist for The Steady Trader. Sign up for his free Weekly Market Outlook Video here. As of this writing, he did not hold a position in any of the aforementioned securities.
