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 is currently set to join the S&P 500 on Dec. 21 and had raised $5 billion on the capital markets last week. However, on the flip side, Tesla recently announced that is shutting down production of its Model S sedan and Model X SUV vehicles at its Fremont, California, factory for 18 days.
It is rumored that the shutdown is for potential reforms of the S and X production lines. Other theories claim that there might be minor design alterations for the Model S and Model X, similar to those applied to the Model 3. Another is that the battery designs outlined for the Model 3 and Model Y are also being used for these premium vehicles.
According to the electric-vehicle news website Electrek, this was explained as Tesla has “already achieved its goal for Model S and Model X deliveries” in the fourth quarter (Q4), allowing employees to focus all their efforts on production and deliveries of the company’s higher-volume Model 3 and Model Y vehicles.
Here’s how to trade TSLA now.
TSLA Chart
On analysis, the overall trend of TSLA seems to be 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 pink color 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.
Daily Chart – TSLA
#2 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.
#3 Piercing Line Candlestick Pattern: The daily chart shows that the stock had recently formed a piercing line candlestick pattern. A piercing line pattern is a two-day, candlestick price pattern that includes the first day opening near the high and closing near the low with an average or larger-sized trading range. This is usually a bullish sign.
#4 MACD above Signal Line: The daily chart shows that the MACD line (blue color) is currently above the MACD signal line (orange color). This is a possible bullish setup.
#5 Bullish ADX and DI: The ADX indicator shows bullishness because (+DI) is greater than (-DI), ADX and (+DI) are above (-DI), and ADX has moved up from below (-DI) and (+DI).
#6 Bullish Aroon: The value of Aroon Up (orange line) is above 70 while Aroon Down (blue line) is below 30 in the daily chart. This indicates possible bullishness.
Recommended Bullish Trade (based on the chart)
Buy Levels: If you want to get in on this trade, you can purchase half the intended quantity of shares of TSLA above yesterday’s close, at around $640. The rest can be purchased above the previous pivot high, at around $650. This is marked as a green 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 $650 and $670 in the next 3 to 6 months.
SL: To limit risk, place a stop loss at $634.00. Note that the stop loss is on a closing basis.
Our target potential upside is 2% to 5% in the next 1-4 months.
For a risk of $6.00, our first target reward is $10.00 and the second target reward is $30.00. This is a nearly 1:2 and 1:5 risk-reward trade.
In other words, this trade offers 2x to 5x more potential upside than downside.
Risks to Consider: The stock may reverse its overall trend if it breaks down from the near-term supports 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 with very high volume from the low of the green candle of the piercing line candlestick pattern, 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 low of the green candle of the piercing line candlestick pattern. This translates to a price of around $565.00. 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 $555 and $540 in the next 3-6 months.
SL: To limit risk, place a stop loss at $571. Note that this stop loss is on a closing basis.
Our target potential downside is 2% to 4% in the next 3-6 months.
For a risk of $6.00, our first target reward is $10.00 and the second target reward is $25.00. This is a nearly 1:2 and 1:4 risk-reward trade
In other words, this trade offers nearly 2x to 4x 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.
Happy Trading!
— Trades of the Day Research Team