It is no secret that stocks are prone to sudden moves in either direction. This could be triggered by economic data, geopolitical events, stock-specific news, or market sentiment.
Trading such volatile stocks are usually considered a high-risk-high-reward venture. Many traders opt to stay out of the trade rather than risk a loss. However, careful analysis of the charts could help you to enter at the right levels, thereby limiting risk to an extent.
With this in mind, we recently started a new weekly series on what we’re calling “the trending stock of the week” —stocks that are being featured heavily in the news right now.
This week’s stock pick is Tesla Inc. (NASDAQ: TSLA).
Why TSLA is trending?
TSLA stock prices dived lower yesterday driven by news of Tesla suspending orders for the cheapest version of the Model Y Standard Range sport utility vehicle (Model Y SR+) and the subsequent disappearance of that version of the vehicle from the website.
The news of Tesla’s rivaling luxury electric vehicle maker Lucid Motor agreeing to go public by merging with blank-check firm Churchill Capital IV Corp also added to TSLA’s decline. Elon Musk lowered the price of its flagship Tesla Model S after the price announcement of the Lucid sedan.
TSLA’s drop is also attributed to the fall in Bitcoin prices. Earlier this month, Tesla had disclosed that $1.5 billion worth of Bitcoin was bought by the company for “more flexibility to further diversify and maximize returns on our cash.” The company had also said that it plans to start accepting payment in Bitcoin. Many investors also rotated out Big Tech and piled into cyclical stocks on Monday, betting on a pandemic comeback, leading to the resulting dip in TSLA prices.
However, Tesla also has some tailwinds. The stock seems to be trading near key support levels as it pulls back. Tesla has also made roughly $1 billion of profit over the last month from its Bitcoin investment. More importantly, the fundamentals underlying Tesla’s automotive and energy businesses are only getting better by the day, as energy storage space is poised to be one of the key areas of focus in the future.
With all these factors in play, here’s how to trade TSLA now.
On analysis, the overall trend of TSLA seems to be still up. There are also 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 purple color line. The stock had taken support near this trendline multiple times before bouncing higher again.
#2 Price Above MA: The stock is currently above the 200-day SMA, indicating that the bulls are still in control.
#3 Fibonacci Support: Usually, after an up-move, stocks retrace to any of the key Fibonacci levels before surging back again. TSLA seems to have taken support at the 61.80% Fibonacci support level of the upmove, as seen in the daily chart. This is a possible bullish sign.
#4 Oversold RSI: The RSI is near oversold levels in the daily chart, which indicates that the stock may reverse soon to move higher.
Recommended Bullish Trade (based on the chart)
Buy Levels: If you want to get in on this trade, the buy level for TSLA is in three scenarios. These are marked as green color dotted lines in the daily chart.
- Buy Level #1: You can purchase the shares of TSLA near the 61.8% Fibonacci level, which translates to a price above yesterday’s close, at around $715.00.
- Buy Level #2: You can purchase the shares of TSLA if it corrects to the previous Fibonacci support level of 50.00%, which translates to a price of $655.00.
- Buy Level #3: You can purchase the shares of TSLA if it corrects to the trendline support, which translates to a price of $553.00.
Important Note: Make sure that you only enter the trade once the daily close is above the recommended price level.
TP: Our target prices for various buy levels are as follows
- The target prices for Buy Level #1 ($715.00) are $800 and $900 in the next 3 to 6 months.
- The target prices for Buy Level #2 ($655.00) are $750 and $800 in the next 3 to 6 months.
- The target prices for Buy Level #3 ($553.00) are $650 and $700 in the next 3 to 6 months.
SL: To limit risk, place a stop loss at the following levels.
- The stop loss for Buy Level #1 ($715.00) is $665.00
- The stop loss for Buy Level #2 ($655.00) is $598.00.
- The stop loss for Buy Level #3 ($553.00) is $498.00.
Note that the stop loss is on a closing basis.
Target Upside: Our target potential upside is 11% to 27% in the next 3-6 months.
- Entry at Buy Level #1 ($715.00): For a risk of $50.00, our first target reward is $85.00 and the second target reward is $185.00. This is a nearly 1:2 and 1:4 risk-reward trade.
- Entry at Buy Level #2 ($655.00): For a risk of $57.00, our first target reward is $95.00 and the second target reward is $145.00. This is a nearly 1:2 and 1:3 risk-reward trade.
- Entry at Buy Level #3 ($553.00): For a risk of $55.00, our first target reward is $97.00 and the second target reward is $147.00. This is a nearly 1:2 and 1:3 risk-reward trade.
In other words, this trade offers 2x to 4x more potential upside than downside.
Risks to Consider: The stock may reverse its overall trend if it breaks down from the Fibonacci support levels and trendline support 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 trendline support and closes below the 23.6% Fibonacci support level, it would point to an upcoming short-term correction. In that case, below are the entry level, stop loss level, and target prices.
Sell Level: You can take short positions on TSLA below the price of around $519.00. 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 $500 and $450 in the next 3-6 months.
SL: To limit risk, place a stop loss at $530.00. Note that this stop loss is on a closing basis.
Our target potential downside is 4% to 13% in the next 3-6 months.
For a risk of $11.00, our first target reward is $19.00 and the second target reward is $69.00. This is a nearly 1:2 and 1:6 risk-reward trade
In other words, this trade offers nearly 2x to 6x 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.
— Trades of the Day Research Team