Weekly chart of Tesla (Nasdaq: TSLA) stock by Frank Sherosky using TD Ameritrade

Tesla stock confirms breakout past resistance

Last July there was only the potential for a short squeeze on Tesla stock. A Torque News reader now laments selling too early, not holding on long enough to Tesla Motors (Nasdaq: TSLA) stock which broke past a key overhead resistance level.

There comes a time when every stock trader kicks himself or herself for either missing an opportunity or getting out too early. Such is the case of a trade in Tesla Motors (Nasdaq: TSLA) stock, perhaps inspired by a Torque News article in July on the probability of a short squeeze. Then again, perhaps they made that decision all on their own based on their own assessment, which I have to applaud.

In my case, I had a day order to sell a put option on Tesla stock back in July. Unfortunately, the order didn't get filled and expired that day; it should have been a standing order; however, I also failed to place another order the next day and missed out entirely. That's the nature of being a writer who travels and forgets.

As a writer and a trader, I’ve been getting more letters these days from traders, which is good. But this one on Tesla stock really caught my attention, because the person caught a price move for a profit, but lamented getting out too soon. At least this person got in on the move.

Whether TSLA was chosen because of my article I wrote back in July, I do not know; and it doesn‘t matter. Fact is, the person believed enough in the stock to vote with their money; it was their decision. And the ironic part about it is that I missed the move due to my own carelessness.

Yes, Tesla stock closed this past week exactly at 34, far above the price are back in July. This latest move this past week, though, confirmed the breakout past the May high of 31.50. That is well above its 52-week mid-point of 28.76; and above its all-time (albeit short) mid-point of 25.70.

For the record, the July article, Tesla Motors (Nasdaq: TSLA) stock attracts short sellers , showed Tesla stock with a high volume of short sellers. That is often a potential for a short squeeze, whereby bulls drive the price up, and the shorts are left with losing positions. So they rush to get out; and their participation exacerbates the move.

What's done is done. And technical or fundamental price moves like the one we see on the weekly chart eventually ends like all things. So, it will take new fundamental news to provide new catalyst for price support. That may be the case with Tesla stock with its confirmation of a higher weekly close past that key resistance level.

The Letter From a Torque News Reader


I just read your July 2011 Torque News.

I am looking for consolation for my choice last week. I bought $8k of Tesla at $27 in July/August. I kicked myself for not waiting ONE MORE DAY, when it dropped to $24, but I had been waiting for it to drop from $29. I love this stock and am very hopeful for its future, especially next year when their new car comes out.

I probably made a rookie mistake because this is my first stock purchase, but I sold at $30.25 to pull some money out, trusting that it would have time to drop again before next year.

I am, again, kicking myself as I am watching it rise after release of its 3rd q earnings. I am left wondering if it will ever go back down again, when my plan was to buy back.

In light of the 3rd q, do YOU think it will ever see $27 or less again before the release of the car?


Thank you for your thoughts,

(Name Withheld by Request)

My Reply

Dear Kicking Self,

Thanks for writing. Realize I am not a legal or financial advisor. So, you'll have to make all decisions on your own. However, I can give you my two cents on the stock technicals so you can make your own judgments.

So, the short squeeze that I suspected in July actually occurred! I was so busy writing, traveling that I missed it. At least you made the play!!! Furthermore, you made a 12% gain. Congratulations.

Sure, you could have made more. Then again, it might turned on a dime, went south along with your profits.

When it comes to stocks, I often look at two charts, the weekly and the daily. In the case of the weekly chart on TSLA, notice the 50-week moving average is at 26.81. Stocks often return to their mean or average, but that may take months or years. Then again in this volatile market, anything can happen.

So, let's view what else the weekly chart at minimum is telling us right now; and that doesn't take a financial analyst: Overhead resistance is still unchallenged at 36.42, the Nov. 2010 high. It recently just broke past the May, 2011 high of 31.50. So, that becomes price support, as well as the 50-week moving average.

On the daily chart, I personally use a 50-day moving average, a 150 day MA and a 21 day MA. In addition, I also use a 5 or 7-day high-low simple moving average channel.

Right now, TSLA has a bullish trend bias likely as a result of that short squeeze. I also see the 50 day MA just crossing the 150 day MA. That's also bullish as far as trend bias is concerned.

Realize that a trend bias is subject to change, though, and will change eventually. That may be the only certainty. But you may/may not use the MA crosses to tell you that message. Point: Your choice.

What you could have done when you owned the stock was to place a trailing stop, perhaps under the low of every weekly bar or the low of the daily chart SMA7 high-low channel. Then raise that stop each week. That way you could have ridden it up. Then again hindsight is always 20/20; been there before myself many times.

Realize that a break above a key resistance level is significant. I know it; other experienced traders know it. Sure, it can fail, but that’s part of the probability assessment that every trader must make. Key is protecting your position, while leaving open the ability to make more if it continues upward.

In your case, you could have sold an upside call option for income. That way you could have made a few more bucks, and provided some consolation if it went sideways. Those strategies come with time and wisdom. You still did great for your first trade; I’m impressed.

Also note the 7-day channel is above the 21-day moving average. That’s another point for a strong bullish bias at least in the short term, in my judgment. Either of those could have been a stop level.

Crucial question is, should you chase this stock? While that’s not my style, as I prefer buying wholesale rather than retail for my stocks, it may/may not be yours.

Bottom line for me is, I do not know how far TSLA will run; and neither does anyone else. I prefer to think in terms of probabilities, because that’s the closest to the truth I can ever get ahead of reality. But I do know for sure there will eventually be a pullback to some level; to what level that may be I do not know beyond shadow of doubt; but I do find buyer support at the daily channel and at the recently broken resistance level of 31.50, which is now support.

That's all I can tell you from my perspective. But, hey, you made money! So, again, congratulate yourself. I wish I had done as well trading the Euro this past week.


Final Assessment

In a follow-up email, the person who wrote the letter thanked me for the educated answer, but still insisted on my opinion on whether TSLA would return to the 27 level. Asking for a specific level then made me suspicious that thinking in terms of probabilities was being overridden by some need for exactness and perfection. I had little choice but to disappoint.

Fact is, I get questions like that all the time; had one at my last seminar where a woman wanted to know if I thought Ford UAW would strike. I told her the truth: I did not know, and likely disappointed her, too.

Truth is, I do not know for sure anymore than anyone else, and there is a reason. I’m not a guru; and those who tout themselves as one generally do not last.

I firmly believe the very best I can do for myself and my readers is to think in terms of probabilities; so I reflect that in all my articles, all my books and all my assessments. Thinking in terms of exact expectations, will-happen scenarios is dangerous in my view; as it negates the reality of a black swan scenario. Furthermore, it reflects a lack of respect for the power of the market; and I learned over the years that the market commands respect or it will remove your means of participating, because it can make you broke.

Key question I had for the letter writer was: What's so magical about 27 as a price for TSLA? If it's related to the 50 week moving average, then I could agree; it looks like good support whereby the stock may revert to that level as its mean value. Is there another basis besides the fact the stock was bought at that price once before? Point: I personally prefer a technical analysis reason.

Will TSLA get back to 27? Good chance considering the volatility of the general market. Timing is another factor. However, what really needs to be asked now is, what is driving the stock higher at this point?

Another question is, once that catalyst dies out, what will keep TSLA making higher highs and higher lows, the basic definition of a bull move? Fact: Once that catalyst dies out and is not replaced by an equal or greater catalyst, the stock will likely tank, like every other stock. After all, every bull continuation must have new buyers, otherwise the bears will take over,

Recall that TSLA has revenues but no profits, only potential for profits. That is the one weight that MIGHT bring it back down to the 27 level or lower, unless the Europe and US debt drives everything lower, and TSLA goes for the roller coaster ride.

Still, 27 is probable, but not a definite. Based on TSLA fundamentals and world economics, sure, 27 or lower has at least a 50-50 chance. Tesla may also go bankrupt in 5 years (that's not a prediction, by the way). So, void of a definitive “yes” answer, I still say - maybe, could happen, likely in terms of economic conditions, etc.

Main point is, that is precisely why I trade the technicals. I let the price dynamics tell me what a stock is doing at all times, and likely to do. It is the only truth there is in the markets. It took many years, but thankfully I think it finally sunk in my brain to let the techncials do my projecting for me; and that has a firm basis in probabilities, never surety.

Trading stocks and commodities is not easy, at least for me; I have to work at it. Fruthermore, the nature of the markets must be respected at all times. And every time I think I know something, the market proves to me that I don’t; and if I’m right, then I perceive that as mere luck; educated, maybe, but luck nonetheless.

Even then, I lose sometimes, leave too soon, get in too early just like everyone lese; and many times I make a great trade and fire on all cylinders. Even the pros will tell you the same. Important thing is to ring the cash register for more gains than losses; then pat tourself on the back and go buy yourself a dinner.

Lesson here is, anytime you make money, that’s a win. It’s not how you do it, but that you do that counts. So you leave some on the table once in a while! Big deal. I once had a mentor who told me not to be greedy, and to leave some on the table for somebody else. I know it doesn’t really work out that way, but I got the message.

Do you know how many times I tried to get that last bit of profit, only to have a sharp downward move wipe out my entire profitable position? Talk about kicking myself. There is nothing more mentally debilitating in trading than having a profit, then losing it.

Point is, that experience alone makes you skittish. It also builds respect, a healthy fear for the market and its probabilities. That in turn leads you to look for strategies like options and trailing stops to help you stay in the market while protecting your positions. And that is what I advised this reader: get educated on how to stay in a good trade that you believe in, while protecting yourself from potential mayhem.

As I wrote in my book, “Awaken Your Speculator Mind,” - you cannot manage risk. You can at best only manage yourself and your money to all the risk that is about you.

Final Note: Special thanks to the letter writer for allowing me to use it as a scenario for a learning moment for all, including me.

Full Disclosure: At time of publication, Sherosky, creator of the auto sector charts for TN, is neither long or short with the mentioned stocks or futures, though positions can change at any time. None of the information in this article constitutes a recommendation, but an assessment or opinion.

About the Reporter: After 39 years in the auto industry as a design engineer, Frank Sherosky now trades stocks, futures and writes articles, books and ebooks like, "Perfecting Corporate Character," "Awaken Your Speculator Mind", and "Millennial World Order" via authorfrank.com. He may be contacted here by email: [email protected] or via his Twitter i.d. @Authorfranks
Additional Reading:
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