Let’s just look at the quick facts about the chart of Tesla Motors Inc. (TSLA): the stock has essentially doubled in roughly one month’s time. Whether the magnitude of the move was exaggerated by a short squeeze or trend followers having to chase the stock higher does not make a huge difference to me at the moment. As a simple rule of mine, through a swing trading perspective, I do not chase stocks higher that are going parabolic.
As it pertains to stocks that make vertical leaps, they often fall into one of four three categories, 1) m&a activity 2) major product approval by a regulatory body 3) a lawsuit or other threat gets lifted or resolved 4) the company overnight has the hottest product in the world. In the case of Tesla Motors Inc. (TSLA), clearly number four applies best. However great the Tesla cars are however, chances are slim that by next week everyone and their grandmother will be purchasing two Tesla cars each, and thus the stock will soon have to put in some sort of a mean-reversion move lower. Much like with Apple Inc (AAPL), emotions are now running high in the stock and one would be wise to tread carefully when playing this stock, in either direction that is.
On the multi-year chart below the recent doubling in the stock price marks the chart with vertical spike higher. Also very typically of such spikes, this rally in Tesla Motors Inc. (TSLA) comes after a multi-year move higher in the stock.
On the daily chart, note that while the stock spiked higher, momentum as measured by the stochatics indicator has moved lower, thus flashing negative divergence versus price. While that’s a first bearish sign, its by most accounts not enough to get leaning against the stock. Just like stocks that fall off a cliff, stocks with vertical moves need time to digest, allowing the emotions to settle somewhat before higher probability trades set up again. In the case of Tesla Motors Inc. (TSLA), Only a major one day bearish reversal move would get me interested on the short side for a trade, while playing the long side of the stock won’t fit my bill until the stock has either corrected a few percent or moved sideways for at least a few days.
Knowing when to stay out of a stock is one of the most important things to learn in this business.