In the swing of things
09/11/18

●Tesla (TSLA) rallied more than 5% yesterday amid favorable analyst coverage

●The up move interrupted the stock’s month-long retreat from near-record highs

●Climactic price action? The stock gapped higher yesterday after gapping down on Friday


 

Never a dull moment. That’s been the Tesla (TSLA) story this year.

Unlike most investors, traders like volatility—in fact, they need adequate volatility to make money over shorter time horizons.

So when a stock moves the way Tesla (TSLA) has moved, you can bet traders are involved—or at least interested. Yesterday, for example, volume in the electric carmaker was approaching 7 million shares just a couple of hours into the trading session, and LiveAction scans showed TSLA options had the sixth-highest volume (more than 122,000 contracts) and the fourth-highest number of trades (more than 27,000) of all individual equities.

Tesla (TSLA), 5/10/18–9/10/18. Triangle: Rebounding after down week

Source: OptionsHouse

But yesterday’s activity marked a departure from the stock’s recent trend (daily chart, above). Traders pushed up TSLA more than 6%—just one day after the stock had closed out a brutal week (-12.74%) that capped a nearly 31% correction from its August 7 close around $380.

No doubt, there are strong opinions on both sides of the TSLA market, with much of the news coverage lately focused on CEO Elon Musk’s antics, which, depending on the side of the market you occupy, is either a red flag for the company or merely colorful.

Less discussed are the company’s business prospects. One piece of news that came out yesterday was the reiteration of a “buy” rating and $411 price target from a high-profile firm following the stock. The analysts who toured Tesla’s factory came away with the impression that, among other factors, Tesla’s lithium battery production facility represents a meaningful barrier to competition in the long term, and will allow the company to drive down costs through economies of scale.1

The analysts also argued that the stock’s nearly 13% decline last week was overdone, driven more by negative headlines surrounding Musk and the departure of its chief accounting officer than fundamentals, which they think could result in the company beating estimates in the second half of this year.2

Chart 2: Tesla (TSLA), 10/3/16–9/10/18. Triangle: Test of support?

Source: OptionsHouse

Of course, some traders may argue the stock was likely due for a bounce from a technical perspective, anyway, as last week’s move brought shares relatively close to their April low, which the weekly chart above shows was the stock’s lowest point since March 2017.

And then there’s the fact that the stock gapped lower between last Thursday and Friday (i.e., Friday’s high was below Thursday’s low), which some traders consider a sign of a “blow-off”-type move that can occur at market turning points. In fact, several recent swing lows have formed when TSLA has gapped significantly lower.

Tesla (TSLA), 10/23/17–9/10/18. Tesla (TSLA) daily price chart. Up moves after down gaps

Source: OptionsHouse

The chart above shows six previous times TSLA has gapped lower while also making at least a 20-day (one-month) low. Aside from the back-to-back down gaps last Tuesday and Wednesday, these down moves were followed by at least short-term up moves.

A swing low is in. Now we’ll see how long it lasts.

Market Mover Update: Nike (NKE) jumped more than 2% Monday, more than erasing last week’s downturn.

November WTI crude oil futures (CLX8) rallied more than 1% intraday yesterday, but reversed to dip into the red and close near the bottom of its range.

 

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1 CNBC. Buy Tesla shares 'even with drama,' Baird analyst says after factory tour. 9/10/18.

2 MarketWatch. Why these bullish analysts found new love for Tesla shares. 9/10/18.