Since the record peak on August 31, Tesla's (NASDAQ 🙂 stock has been in a serious downward spiral. Yesterday the stock fell 21.1% – it was the worst day ever for equity.
That one-day sell-off would be enough to put the stock in a bear market. However, Tuesday's plunge took place on the heels of three days of additional sales, bringing the stock 33.8% below its August 31st all-time high of $ 498.32 (the 5: 1 split adjusted price).
The sell-off takes place amid a perfect storm for Tesla, as a prominent member of the already troubled technology sector currently being dumped by investors, but also after it was rejected when the index included some of its listed companies on August 31
Not getting transported in the SPX doesn't seem like such a big deal, though. But if they're not included in the benchmark that lists some of the US's largest companies, it means that fund managers tracking the broad index would be forced to buy Tesla only, if they wanted to buy it at all.
It appears investors had already priced in Tesla's inclusion in the S&P because it met the applicable criteria – headquartered in the US, has a market capitalization well above the required minimum of $ 8.2 billion, was highly liquid and had finally reached a point where the sum of his earnings for the last four quarters was positive. Some say this is why the stock enjoyed such a steep run-up prior to the rescheduling.
Many believe that the price of Tesla stock – even before the recent surge – bears little resemblance to the underlying fundamentals. Nonetheless, we were on Tesla in mid-August (before the split), and we're optimistic about it again.
Techniques show why we think this could be a good recovery point for the stock.
Tesla has been trading in a bullish channel since its March low when it entered this year's first bear market after falling nearly 62% from the February 19 record to the March 18 low. That's almost double the current percentage-based slide.
In August, we predicted that the stock would hit new highs after completing a bullish pennant, which it did. Then it broke out of the rising channel, suggesting a steeper slope.
The current slump brought it back into the canal. However, it has found support from an even sharper upward trend on June 29, possibly the bottom of a new, even steeper upward channel, just as the upward breakout was signaled.
While the 100 DMA points to the bottom of the original rising channel, the faster 50 DMA suggests that the recent, more steep (dashed) upward trend line may be the new demand boundary. Meanwhile, the stock is back above $ 350 at the time of writing, in pre-market.
Even if this young trendline will not withstand the pressure, the price is still expected to bounce off the bottom of the original upward channel. While it may seem counterintuitive, despite the stock being in a bear market, based on the 20% arbitrary accepted move, it is still on an upward trend given the direction of the highs and lows – showing a general rising demand
Conservative traders would wait with a long position for price to return to the bottom of the original channel, after a recovery, with evidence that demand is still greater than the supply at these levels, with at least a single, long green candle.
Moderate traders can buy at the bottom of the new channel, after confirming support with accumulation.
Aggressive traders can take a long position at will, provided they understand, accept and can withstand risk, without it affecting their portfolio in such a way that they cannot recover. Money management is key. Here's an example:
Admission: $ 350
Stop-Loss: $ 325 – Down from yesterday's low
Risk: $ 25
Target: $ 500
Reward: $ 150
Risk: Reward Ratio: 1: 6
Author's Note: This above is just an example, not the actual analysis. For that, you must read and understand the entire post. If you haven't, then DO NOT act, and if you have, it's still a gamble.
This sample is not necessarily the best way to approach trading. It depends on your timing, budget and risk aversion. Feel free to fine-tune the parameters to optimize trading. If you don't know how to do that, then DO NOT switch to the trade, and if you do, it is still a risk.
For example, raise the target to $ 550 to increase your risk reward ratio to 1:10, but the price may not come when you want it, if at all. If you do raise the target, use a trailing stop to lock in winnings. Good trade!