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Last month’s earnings report was the ultimate buy the rumor, sell the news event for Tesla (NASDAQ:TSLA). Despite announcing robust quarterly numbers, traders rapidly rejected the gap higher, using the overnight jump as a chance to ring the register. Since then, TSLA stock has been dead in the water.
Today I want to look at the silver lining of its suddenly sleepy behavior and identify the price level that needs to be broken before buying.
Instead, it’s a conclusion drawn from comparisons. Since Tesla trades on the Nasdaq Exchange and exhibits high-beta momentum characteristics, the PowerShares QQQ Trust (NASDAQ:QQQ) is arguably the most appropriate benchmark to compare it against.
Consider the accompanying chart overlay showing TSLA stock in candles and QQQ as a line chart.
For the majority of the chart, they have been strongly correlated. Rallies and selloffs in QQQ have been mirrored by Tesla. But not over the past two weeks.
Let’s take a closer look at the price chart.
To avoid losing sight of just how historic Tesla’s ascension has been, start with the weekly chart. From the March bottom to last month’s peak, the stock rocketed higher by 412%. It was a mania of the highest order. The pullback we’ve seen has been shallow compared to the ascent. We’re miles away from all the major weekly moving averages and still overbought. From that perspective, pausing or pulling back here is a welcome development.
The daily trend shows just how rapidly volatility has compressed. This morning, TSLA stock is working on its third doji candle in a row. Still, the length of the consolidation has now caused prices to push below the 20-day moving average, which is a short-term sign of weakness.
While the sideways shimmy might be frustrating adrenaline junkies used to Tesla’s monster moves, it is creating some easy-to-spot levels to trade around moving forward. Instead of buying or selling now, in anticipation of its next move, why not wait for confirmation? Bulls should wait for a break above $1,550 to signal the next up-leg has begun. Bears should wait for a push below $1,420 to signal a deeper correction is developing. Until then, I suggest not forcing trades.
Given the speculative fervor still gripping stocks, and the overall uptrend Tesla stock finds itself in, I suspect the breakout will be higher. But sans confirmation, I wouldn’t bet on it.
The Trade: Buy the Sep $1600/$1700/$1800 call butterfly for around $8.
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