Tesla Motors (NASDAQ: TSLA) was mired in a downward sloped trend channel for the better part of seven months before it broke out of the channel earlier this month. Tesla stock also faced some potential resistance at the $220 level, but it busted through there yesterday with a big move up.
The move came as the company is set to unveil its home battery technology on Thursday. The batteries use the same technology as its car batteries, but on a larger scale so that they may be used to power houses or businesses.
Turning our attention to the weekly chart, we see a couple of possible developments that could lead Tesla stock either way. The $180 level has acted as support twice in the last year, which could mean that a double bottom has formed and now the stock is ready to challenge the $290 level once again. The other possible outcome is for the stock to see resistance again in the $265 range, which could be the second shoulder of a head and shoulders pattern.
Looking at the sentiment toward Tesla stock, we see a short interest ratio of 4.7, which is borderline high. The analyst ratings are leaning a little toward the bullish side, with 11 “buy” ratings, six “hold” ratings and three “sell” ratings.
While these two indicators are neutral to bullish currently, they have come off of extreme bearish readings over the last two years. Back in the spring of 2013, just before Tesla went on that run that saw the stock price quadruple, the short interest ratio was up at 20.
So how do you play Tesla at this point in time? I would wait for the stock to come out of overbought territory on the daily chart and then buy it.
If you can get the stock down around the $220 level and then it jumps to the $265 level to form the right shoulder of the head and shoulders pattern, you are still looking at a gain of 20%. At that point, you could sell and take profits on the whole position. You could also sell a portion of the position, or even hang on to the whole position and see if the double bottom pattern prevails and the stock jumps back up to the $290 level.
Another scenario you could use is to buy the stock in the $220-$225 range, and if it rises to the $265 range (which I think it will), you could hold on to your entire stake but buy protective puts at that time. The puts would protect the gains you will have earned, but you can still profit from an additional climb to the $295 level.
If the stock gets back to $29o, you could employ the same strategy at that time – buy protective puts to protect your gains, but hang on to the stock to see if it breaks out again.
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