Tesla Breakout

As an update to this post on Tesla, we can see as expected, Tesla ripped through the 190 mark and kept going. I expected lots of reasons that the ultimate top in Tesla is not in yet. Despite eventual overhead resistance, the tendency for Tesla to rip through 190 and keep going without really slowing down too much gave me plenty of optimism. Even so, I expressed concern that into strength there may be some risk that Tesla would roll over, and even if it wasn't the most likely move, the shares of TESLA could become top heavy and filled with people that either shorted from above and had no reason to expect the move was done, or bought from above and are trapped in from higher prices with little support below.

I was considering eventually shorting into strength due to the risk/reward profile but did not actually place the trade because the stock didn't seem to have trouble finding supply and as I considered, there was enough short sellers that needed to cover to initiate a short squeeze. Traditional volume profile provides reference points for support/resistance but is no guarantee that the psychology of people will act the same way everytime which is why using the past as a reference can be useful.

To the cynical, trying to explain reasons for both sides is a way of hedging your bets and to them I'm trying to speak out of both sides of my mouth. But to the experienced trader, they know you have to always identify a spot in which you are wrong, and manage your risk so that your reward provides a disproportional upside relative to the risk as that allows you to be wrong more often than not and still make money. The high probability trades can work too, but still require a risk that is not too disproportional to the reward.

For example if you are right 75% of the time, the sum of your wins have to add up to more than the sum of your losses. Since you will lose once in 4 trades you need your loss to not exceed 3times your win. You can win 3 times lose on the 4th and still break even.
Conversely if you have a reward to risk of 3 times your loss, you can lose 3 times, win on the 4th and break even so you only have to be right 25% of the time.

Although the case I made for Tesla was higher and that is where I believe the odds and edge was at the time, should Tesla trade higher enough into the [210] range the stock would represent tremendous reward to risk in that you can clearly identify where the bearish case is wrong, and if you are right about the bearish case you can stand to make several times what you are risking.

This is where things can sometimes get confusing because if you have a call position you shouldn't necessarily sell at the same point in which buying a put makes sense. That's because you still are betting on a fast move as much as you are betting directionally and until the move shows signs of absorbing supply you shouldn't sell and you should also develop the habit of letting your winners run and only selling it when there's evidence the trade isn't working. You might however decide to take some profits.

There's sometimes a weird range when both HOLDing an existing bullish trade and buying a new bearish trade may make sense. That's because if for example you buy a put at 208 and sell at 212 while holding a call at 208 and selling if it begins to roll over or show weakness (say around 206) you still have disproportionate upside on both trades so that you don't have to be right about either trade reaching a technical target very often. You aren't basing your trade off of high probability, but high reward when the probability is in your favor. Should the stock breakthrough and keep going, there's a technical target of as high as 270 just based upon falling wedge patterns returning to the prior high. Additionally, if it breaks 270 and continues to respond well, the measured move from the low to the high added onto the high of the pattern puts this stock's target above the all time high and somewhere around 360.

Short squeezes can propel a stock quickly, especially one that has a tendency to move quickly and is typically either a high growth name or a negative earnings name with high potential for completely turning around it's earnings to positive where the valuation can quickly become much more favorable, especially on a big earnings surprise. The mere expectation of higher growth or earnings revision or positive earnings surprises can fuel the shift in sentiment to propel a stock higher with increased confidence and buying. This is another reason that support based upon price history hasn't exactly worked so far for Tesla and why the stock has swung above and below levels that should act as support/resistance in many other stocks.


There's still a chance Tesla's short sellers who covered now start selling. There's still a chance buyers from higher combined with a shift in confidence can reverse the stock below what was resistance and is now more support. If that happens there is a top heavy stock full of potential bagholders who suddenly all want to sell and few buyers below to pick up the pieces which is a recipe for a quick decline. However, as we've moved above this level the stock is currently buyer controlled with buyers and past sellers below that will typically look to buy should prices dip.

As such, if you are looking for a spot to sell this name, you probably will be better waiting until the conditions change or a bearish pattern develops. If you are long you may have taken some profits near the volume profile zone of resistance at around 210 and you may take some more profits as a stock moves higher but I wouldn't sell out completely yet until there's evidence of a reversal, buying euphoria or buying exhaustion or a stock reaches it's next target.

Additionally your target should be consistent with your system which considers reward, risk and winrate and maintains long term profitability with plenty of margin for error.

As always, see the disclaimer.