Tesla Is Not Just A Story, It's A Beautiful Chart!

JC Parets
August 17, 2018

I live in a funny world where I can just write some things on my phone or computer and people all over the world begin commenting on it. These conversations can last for months, even years. Those who know me understand that I try to do my very best everyday to look at the market as nothing but letters and math. It shouldn't matter whether we're long Apple or short soybean futures.

Some assets strike a cord with people and make them feel differently. There is usually a popular figure involved or hot product and sometimes even conspiracy theories. It's fascinating to watch. Gold is definitely one of those. The crazies come out whenever you mention gold, bull or bear doesn't matter. Natural Gas used to be like that 12-15 years ago, but not since it lost 90% of its value over the past decade. This one is the bitcoin of energy.

Over the years, things like Apple and Tesla have had some cult followings in their stocks too. But most recently it's been $TSLA and the fact that they get to gossip about elon musk to get them away from writing about trump every day. Everyone wins. I saw an opportunity about two and a half months ago to purchase shares of $TSLA after the completion of, what I felt, was a failed breakdown, which in my experience often leads to very fast rallies in the opposite direction.

I learned this one from my pal Brian Shannon, that "from failed moves come fast moves". The best part about great strategies is that you can build upon them. It's not just the fact that from those failed moves come incredibly fast ones, it's that the risk becomes very well defined in the process. This is the whole point. We want to position ourselves where 1) the risk is clear, 2) the upside is exponentially greater than that risk, and 3) we have the probabilities on our side. This is the trifecta we're always looking for.

Here is the chart of Tesla that appealed to me in early June. I saw overhead supply in $TSLA just around the 280-290 area from 2014 into early 2017. It was not until those levels were exceeded that the market proved there was more demand than supply:

The trade became simple in early 2017: you buy $TSLA and stay long until prices get up towards 370-384, which represents the 161.8% extension of that entire 2014-2017 correction. This was a perfectly logical target, well defined risk and probabilities on your side. That trifecta that we talk about.

Sure enough, prices reached that target in June and started to consolidate. All of this was the type of behavior we should expect. The thesis being, that after some time, prices will resolve higher, and then head towards 500. After a year went buy, the sentiment that had been so optimistic in the past became sour. You couldn't find a positive headline on the name, which I love. We had more wall street sell recommendations than buy recommendations, which is rare. And then prices in late March of this year broke below those 2014-2015 highs.

What attracted me was the fact that $TSLA historically behaves very well. This is not a mess, like Coca-Cola $KO for example. So the trade in early June became simply, be long $TSLA if we're above 300, with a target of above 500, betting that not only would it rally, but the failed breakdown would be the catalyst to break it out of this year long range to new all-time highs. Then at that point, sky's the limit. I'd make that trade 100 times out of 100 if they existed as much as I would like.

The trade started to work. In fact, our options trade hit our target in just 4 days! The stock trade on the other hand, did get back up towards those 2017 highs, twice actually. And now they're back down towards the bottom of the range. So what do we do?

Let's remember that we live in a world of incomplete information. We have to make decisions based on the facts that we do have, knowing full well that we don't have them all. Here's what we know:

  • Tesla is in a long-term uptrend
  • From 2014 through early 2017, there was more overhead supply than demand below $290
  • In April of 2017, the market proved that there was now more demand than supply at $290
  • Prices reached their upside projections later in 2017 and the market began to digest those gains
  • It has now been 14 months of consolidation, within the context of an ongoing uptrend

These are the things we know for certain to be true. Everything else is gossip.

Moving forward, if we are below 290, it would be evidence that the demand has run out and supply rules once again at that level. Prices are likely to fall even further in that case, or at the very least do nothing. Neither of those are things we like. There is absolutely no reason to own this thing if we are below 290, especially with that bearish momentum divergence this month. It would be spectacularly irresponsibly in my opinion.

On the other hand, based on our work, it would be almost as foolish to not be long the stock if we're above the 2017 highs. The bet we were making (except in options) was that this failed breakdown in March was the catalyst to break it out above the former highs and take it up much higher towards 500:

At this point, I still like this from the long side, but certainly not if it is below 290. I also like the neutral trade, which is to do nothing here near a flat 200 day moving average. The one I like the most moving forward, however, is long $TSLA if it is above those 2017 highs. In that case, we would be in a similar scenario to where we were in March of 2017, just before it rallied 100 points, about 35%.

The idea is to constantly be reevaluating a thesis. We have no way of knowing what will happen next. So as the data comes in, we have new evidence that points towards a certain outcome. The one thing we know is that things will always be changing. Our job is to interpret that data as best we can set up asymmetrical risk vs reward scenarios that are constantly skewed in our favor.

I try to do this the best I can every day. I even have a bunch of traders and investors around the world that pay me to look at my homework. I'm happy to share that with you as well, if you're interested.

The options strategy in $TSLA worked better than the stock trade, which is only up a few % points the past few months. If you're more interested in options, check out the video of our latest conference call. We're sharing it this month only for free to give everyone an inside look at the type of work we do.

I really enjoy thinking outloud and writing about this stuff, so I hope it adds value to your process.

Let me know if you have any questions, or ping me even if you just want to say hi.

JC

I'm coming to Toronto August 23rd for live presentation at the CFA Society. Here are the details.

Also, I will be in Dallas, Austin & Houston September 4-6. You can register for these Free live events here.

 

 

 

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