Every once in a while, a stock comes along that defines the times. In 2019-2020, that stock was electric carmaker Tesla (TSLA).
Tesla's stock price went from under $40 to nearly $200 in 8 months, and dominated the news headlines along the way. Tesla was getting more attention than just any stock out there, aside from maybe Apple (AAPL).
Some traders made fortunes. Others had their hearts broken.
Two big things were happening:
- Bears ignored powerfully bullish technical signals
- Bulls pushed things beyond what seemed reasonable.
And by studying this one stretch of Tesla’s price action, you can learn a lot about momentum, risk management, permabears, and the power of a cult of personality.
I’ve distilled Tesla's big run into 7 important lessons, which you’ll start learning right now.
Scott Redler's Positions as of 11/9/2021 at 3:34 p.m. ET.
1. Understand That Some Stocks Are Just Plain Different
Some stocks have such a powerful story that investors will routinely ignore short-term bumps in the road.
Amazon (AMZN) is a great example. It’s missed on earnings plenty of times and had its fair share of bad news, but people have believed in the long-term story so much that every dip gets bought. Very few companies command that type of respect, so Amazon is basically in its own category.
The long-term chart says it all:
Tesla is also just plain different from the crowd in that it routinely goes from “left for dead” to “can’t be stopped.”
Call it… the Elon Musk factor. Not many CEOs can get away with smoking pot with Joe Rogan.
And that’s not the only trouble Tesla’s survived: there was the infamous ‘funding secured’ tweet, which attracted the attention of the SEC:
Am considering taking Tesla private at $420. Funding secured.
— Elon Musk (@elonmusk) August 7, 2018
What sets Tesla apart is its unique power to be forgiven for its misdeeds.
There are core believers that are ready to juice the stock up at any given moment.
These folks are 100% convinced in Tesla’s ability to succeed in electric cars, solar power, energy storage, and whatever Elon Musk comes up with next.
And there are shorts that believe the company is just one step away from failure.
So Tesla is a cornered animal.
You can’t turn your back on it.
Because every time Tesla seems like it’s on the verge of disaster, or that the stock’s just gone too far too fast, Elon Musk pulls a rabbit out of the hat.
And just when it seems like it’s blue skies ahead, it stumbles.
Tesla is a truly unpredictable stock -- especially for a large cap.
You never know what’s coming next.
2. Price Action Rules
If you follow me on Twitter, you know that I follow the 8 & 21 day moving averages very, very closely.
They’re my short-term momentum monitor. When stocks are trending above the 8 & 21 day exponential moving averages, I don’t fight them.
The #1 reason traders lose on shorts is because they look at a chart and say “that’s gone too far. It has to go down.” But stocks like Tesla go too far all the time. It’s in their very nature. If a stock goes from $20 to $40 in the blink of an eye, you can’t count out $50. And if it gets to $50, you can’t count out $60, etc.
Now, before you turn the page, look at the chart below.
It is naked aside from two moving averages. What do you see? I see a lot of opportunities.
Let’s break it down step by step.
A) The Earnings Gap Holds
On October 24, 2019, Tesla had a big pro earnings gap that woke it up. That was the moment we knew it was coming alive. And then it didn’t fill a single penny of the gap. That’s a sign of strength you can’t ignore, and should have been a wakeup call for the shorts.
B) Cybertruck Consolidation
In mid-Nov. to mid-December, Tesla had a healthy consolidation, with the 8 & 21 day refusing to break. As we’ll discuss later in more detail, this was during the Cybertruck launch drama, which was a pivotal time for the stock.
C) Major Breakout Level
You saw before how quick the short-term move was, but it’s also helpful to view things on a longer time frame because when historic levels get broken, they attract a lot of traders’ attention.
And in this case, we're talking about the Major Breakout Level at $76, which was a prior high for the stock.
Turns out, what came next was even more explosive than I could have imagined!
D) Accelerating Above the 8 Day
This was one of the most powerful moves I’ve ever seen. It was straight out of 1999.
From December 5, 2019 to February 11, 2020, Tesla did not test the 21 day a single time.
There was a quick test of the 8 day on February 6, but it was quickly reclaimed.
E) The Parabolic Move
Do we really need to explain this? Tesla went absolutely wild, hitting $193.80.
So what am I saying? Price action rules. Period!
This trend demanded respect! And speaking of respect...
3. Respect Stocks That Refuse to Die
Let’s talk about the Cybertruck, which Elon Musk unveiled on November 21, 2019:
Here are some headlines from the event:
But how did the chart react to the Cybertruck launch, which included Elon Musk accidentally breaking a window?
Let’s move in for a closer look:
Tesla gapped down after the Cybertruck announcement.
And then, on November 26, Elon Musk tweeted that preorders hit 250,000, which basically nullified all of the criticism.
By refusing to break the 8 & 21 day, Tesla was telling you it wasn’t going down without a fight.
And then when the Cybertruck announcement gap was filled with the 8 & 21 day being reclaimed, that was a sign sentiment was turning very positive.
The lesson: if a stock refuses to die, show it some respect.
4. Be Careful When Hot Stocks Extend From the 8 Day
I did very well with Tesla from the long side, especially with the call options and call spreads I bought in November.
But I also sold call options to give me short exposure 4 separate times when it got super-extended from the 8 day. When a really hot stock gets far extended from the 8 day, it’s susceptible to pullbacks.
The naked shorting of options is a very risky strategy, and I execute it rarely. It's certainly not appropriate for most people.
Anyway... when a stock goes parabolic to the upside, I use the distance from the 8 day moving average to get an idea of when something’s gone too far, too fast.
This is particularly tricky with Tesla because, as I told you before, going too far, too fast is just what Tesla does.
This is where experience pays. And at the risk of sounding a little salesy, it’s where my services come into play.
Because I’ve been through so many booms and busts, I’ve become pretty good at judging when things are truly getting out of hand.
And I’m always trying to translate that feel into usable information for traders.
Anyway… let’s go to the chart.
You can see here that Tesla’s pullbacks all started from an extension above the 8 day. This is fairly common with momentum stocks.
That last move was really something else. I was tempted to get short the day before that $193.80. high, but backed off.
It’s a good thing, because Tesla gapped up $20+ and ran another $17+ before topping out.
I did my final Tesla short call trade after the peak. When Tesla was around $176, I sold weekly $240, $260, and $280 calls for some pretty fat premiums.
I made money all four times I shorted Tesla calls when it extended, but I also lost a lot of sleep.
Know what you can handle!
5. Don’t Change Your Life Because of One Big Trade
In Q4 2019 through early 2020, I had one of the most profitable runs of my trading career.
And Tesla was one of my biggest moneymakers.
This brings me to another thing I’ve learned after 20+ years of pro trading: the good times don’t last forever.
If you made a lot of money trading Tesla or any other stock, don’t go crazy.
The worst possible thing you could do is upgrade your lifestyle.
Because once your expenses go up, you’re in big trouble the next time you hit a cold streak.
You’ll be forcing trades and acting out of fear because you’ll be so desperate just to pay your bills at the end of the month.
You just might dig a hole so big that you’ll wash out altogether.
The smart thing to do is pay down debt or make long-term investments.
What am I doing with my Tesla money?
I’m not going out and buying a Ferrari!
I’m putting a new kitchen in my house.
6. Short Interest Can Create a Self-Fulfilling Squeeze
Here’s a chart of Tesla short interest from mid-June to mid-January:
As Tesla went up, short interest went down.
Shorts were covering their positions as Tesla was rising.
The thing is, short interest is not a secret -- everybody knows about it.
And in this case, that knowledge turned into fuel for what now looks like an inevitable squeeze.
The bulls knew Tesla was a heavily shorted stock.
And they knew that a rising stock would force the shorts to cover.
It’s a vicious: the bulls buy, which in turn forces the shorts to buy, which just attracts more momentum buyers, which forces even more shorts to buy.
And so on, and so on.
It’s a self-fulfilling cycle.
High short interest is typically a sign of trouble. Because when there’s smoke, there’s often fire.
But when a stock is trending higher, high short interest can mean more fuel for the bulls.
7. There Will Be Other Teslas, and You Can Trade Them!
There will always be hot stocks to trade, though admittedly, they don’t get much hotter than Tesla.
And everything I taught you in this article-- about respecting the trend and letting price tell you what news matters -- can be applied to other stocks.
So I trust you have some new ideas about how to handle other hot names like Nvidia (NVDA), Roblox (RBLX), and Salesforce.com (CRM).
Try not to judge them by what you think will happen.
Focus on what the market is telling you.
As you gain experience, you see that putting your ego aside and listening to price is what really makes you money.
Very smart people go bankrupt every day because they think they can predict the future.
I can’t predict where Tesla is going.
But I know how I’ll react based on how it behaves, and I hope that you have a better idea of how you’ll react.
And of course, if you want my ideas, you can always join me at Power Plays. Click the button below to get started today: