It’s no secret that breaking news can trigger stocks to make sudden moves in either direction.
News catalysts could be updated economic data, geopolitical events, stock-specific news and changes in market sentiment.
However, careful analysis of the charts could help you enter your trade at the right price level, limit your risk and maximize your profit.
With this in mind, today we’re starting a new weekly series we’re calling our “Trending Stock of the Week”. In this series, we feature a stock that’s trending in the news and offering a potentially attractive trade opportunity.
This week’s featured stock is Tesla Inc. (NASDAQ: TSLA).
Why is TSLA trending?
The electric car and solar panel maker posted its fifth-straight profitable quarter yesterday. TSLA reported $331 million GAAP net income, brought in record revenue of $8.77 billion, and beat analysts’ estimates for the third quarter of 2020.
The company reported an uptick in vehicle deliveries and announced noticeable improvements in its solar and storage businesses, and sales of environmental regulatory credits to other automakers.
The price of TSLA [Last Close: $422.64] rose by +19.82 (4.69%) overnight on the stronger-than-expected earnings.
However, the charts are not yet signaling a breakout.
Here’s how to trade TSLA after its Q3 earnings beat…
There are multiple bullish indications on the daily chart of TSLA.
#1 Uptrend Unbroken: The daily chart shows that Tesla’s uptrend is unbroken, as it has been forming higher highs and higher lows for the past several months. This uptrend line has been marked as a pink color dotted line. The stock had taken support near this trendline multiple times before bouncing higher again. These bouncebacks from the trendline are marked as orange color ellipses in the daily chart. Currently, the stock is near this trendline support again, indicating the possibility of an upmove soon.
#2 Consolidation pattern: Currently, Tesla appears to be in a consolidation phase with a narrowing range, which is a classic pennant pattern. This is marked in the chart as purple color lines. TSLA had formed a similar pattern and broken out of it during mid-August 2020. With a similar set-up happening currently, TSLA appears to be gearing for another strong move.
However, be warned that such a narrowing range of consolidation means that a strong move could happen in either direction, i.e., upwards, or downwards.
#3 Price Above MAs: The stock is currently above the 50-day as well as 200-day SMA, indicating that the bulls are still in control.
#4 Low Volume Correction: During the past few days, TSLA was correcting with low volumes. Such low volume pullbacks are usually attributed to weak longs locking in profits rather than a reversal.
#5 Bullish RSI: The daily chart shows that the RSI is moving higher and is currently near 50, indicating possible bullishness.
Recommended Bullish Trade (based on the chart)
Buy Levels: If you want to get in on this trade, the ideal buy level for TSLA is above the breakout level of the pennant pattern at around $460. This is marked as a green color dotted line in the daily chart.
However, those with a higher risk appetite can purchase shares of TSLA above the nearest short-term resistance level of $431. This is marked as a blue color dotted line in the daily chart.
Important Note: Make sure that you only enter the trade once the daily close is above the recommended price level.
TP: Our target prices are $500 and $520 in the next 3 to 6 months.
SL: To limit risk, place a stop loss at $437 (for entry near $460) and $402 (for entry near $431). Note that the stop loss is on a closing basis.
Our target potential upside is 9% to 21% in the next 3-6 months.
- Entry near $460: For a risk of $23.00, our first target reward is $40.00 and the second target reward is $60.00. This is a nearly 1:2 and 1:3 risk-reward trade.
- Entry near $431: For a risk of $29.00, our first target reward is $69.00 and the second target reward is $89.00. This is a nearly 1:2 and 1:3 risk-reward trade.
In other words, this trade offers 2x to 3x more potential upside than downside.
Risks to Consider: The stock may reverse its overall trend if it breaks down from the pennant pattern with high volume. The sell-off of the stock could also be triggered in case of any negative news, overall weakness in the market, or any regulatory changes in the sector.
Recommended Bearish Trade (based on the chart)
In case the stock breaks down from the pennant pattern with very high volume, it could point to an upcoming short-term correction. In that case, below are the entry levels, stop loss levels, and target prices.
Sell Level: You can take short positions on TSLA if it breaks down from the pennant pattern, and closes below the trendline support as well as the long-term support level of $400. This translates to a price of around $393.00. This sell level is marked as a red color dotted line in the chart.
Important Note: Make sure that you only enter the trade once the daily close is below the recommended price level.
TP: Our target prices are $360 and $320 in the next 3-6 months.
SL: To limit risk, place a stop loss at $409. Note that this stop loss is on a closing basis.
Our target potential downside is 8% to 19% in the next 3-6 months.
For a risk of $16.00, our target rewards are $33.00 and $73.00. This is a nearly 1:2 and 1:5 risk-reward trade. In other words, this trade offers nearly 2x to 5x rewards compared to the risks.
Risks to Consider: The stock may reverse its overall trend if it breaks upwards with high volume. The breakout of the stock could be triggered in case of any positive news, overall strength in the market, or any regulatory changes in its sector.
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