Thanks for taking the time to read today's blog post. Today, we'll talk about how we bought the bottom in $TSLA and after realized gains of over 800% we are ready to take profits.
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I have been following Tesla Motors, now Tesla (stock symbol: $TSLA), for as long as I can remember. When I had first heard about Tesla building an electric car when I was working for Citigroup I was hooked. Having designed the first sustainable business school and being the president of the entrepreneur club at my college I was ecstatic to hear about Elon Musk and his vision for the future of the automobile industry. Finally, I thought, someone who gets it. When I told my former college roommate, Vishaal, about the electric vehicle maker he told me "they're going bankrupt".
I was in disbelief, here was my friend newly minted to the Finance world working for Goldman Sachs telling me this business with a truly unique business strategy was going to fail! This wasn't the first time we had these arguments, of course, he also thought Apple was a joke with its first iPhone too, and later came around trying to take on the idea of how cool Apple was when I championed them to begin with... so I knew was on to something.
Despite all the rhetoric of Tesla going to fail by bearish money and hedge fund managers such as David Einhorn, Jim Chanos and Tommy Thornton, etc. talking of their demise, it has never come to fruition. Elon Musk has even mentioned how close they have come to going bankrupt and has taunted the shorts time and time again as Tesla has been one of the most shorted companies in the world.
While shorting the market has its benefits, it's generally for very experienced traders or investors with a long time horizon looking to hedge their position. For instance if you did hold a lot of Tesla into February of this year putting a hedge via puts or short some equity is beneficial to protect a very large position. Yet, like all stocks there comes a time to take some profits on your position.
So we know how the story ended for shorts, how do we as investors and traders capitalize on theses potential opportunities? We already have the start to that answer from our recent guest blog post: Patience, discipline and keeping our emotions in check.
In February of this year I got very bearish on U.S. equities as the concerns from COVID-19 were very muted and after $TSLA got cut in more than half from $193 to $70 I congratulated the shorts on their great calls. Funny thing was that none of the shorts conceded on their wins and triumphantly walked away at the time. They continued to want this amazing company to fail, now I was walk out of my apartment building to grab some lunch I see 3 or 4 Tesla's cross my path on a daily basis.
The day of that tweet was from my perspective an extremely technical point in $TSLA's chart which nearly all technicians follow - the 200 Simple Moving Average (which held on a daily and weekly basis), which denotes the long term trend of a stock and if you want to be bullish or bearish. Below 200 SMA -> bearish, above 200 SMA -> bullish, keep it simple. See the below chart where the horizontal line of the cursor meets the red 200 simple moving average:
Holding this key level on March 13th, 2020 allowed us the opportunity we needed to get long Tesla and hold with a stop below that level (~$70). Keeping it simple we can being to add to our position and continue to hold as long as we are above this key moving average. We would utilize different technical patterns to add to our position and on days where the stock gets "frothy", a lot of noise or people talking about Tesla we can reduce our position and wait further to add.
That's all great WizDayTrader, but how do I know when to sell and take some profits and not sell prematurely?? Great question!
The funny thing about Wall Street and the world is human behavior, it's how we get tops in the markets, why the patterns we look at in the markets repeat, and also allows us to sell our positions when we've already entered them long before the majority has done so. Today, I'd like to introduce a new concept, Elliot Wave Analysis. The Elliott Wave Principle posits that collective investor psychology, or crowd psychology, moves between optimism and pessimism in natural sequences. These mood swings create patterns evidenced in the price movements of markets at every degree of trend or time scale.
To keep it simple, major moves in prices of with price tend to impulsively move in 5 waves. R.N. Elliot, the founder of Elliot Wave Analysis, discovered that market price movements adhere to a certain pattern composed of what he called waves (referenced in CMT Level I Curriculum: An Introduction to Technical Analysis), note that every wave has a starting point and end point. The ending point of one wave marks the beginning of the next wave (higher or lower) in price.
Using this analysis we apply it to Tesla's weekly chart, below you can see what I believe to be a five wave move in Tesla's weekly chart.
We've had an EPIC short squeeze in Tesla just as Elon Musk promised. So let's take our victory lap, drink some Teslaquilla and maybe take a joy ride in our Tesla as we celebrate being patient, disciplined and controlling our emotions to reap our rewards in the market.
Essex's Trading Quote of the Day (#EsxQotD)
“Every decade or so, dark clouds will fill the economic skies, and they will briefly rain gold.”
~ Warren Buffett