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Wednesday, April 14, 2021

What Comes Next For Tesla?

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Tesla (NASDAQ:TSLA) continues smashing all sensible expectations and closed above $2k for the first time ever.

Stocks that are high tend to move even higher and that is definitely the case here. Back in June I accused TSLA of being in a bubble and with prices 100% higher today, I stand by that assessment. But unlike most people, I don’t fear bubbles, I chase them. That is exactly what I told readers two and a half months ago when TSLA first broke $1k:

Tesla Inc Daily Chart

Tesla Inc Daily Chart

This is a red-hot stock and there is a very good chance this is another bubble. While that scares some people, what should we do when we see a bubble? Why, buy it of course! What a silly question.

I’ve long since lost count of how much more TSLA is worth than all of the other auto manufactures combined. Obviously, this kind of insane valuation isn’t sustainable, but as traders, we don’t concern ourselves with these long-term outlooks. Instead, if the market doesn’t care about sensible valuations, then neither do we.

Now, don’t get me wrong, I’m not saying we should buy this and hold it no matter what. In fact, that is the exact opposite of what a savvy trader does. But we definitely shouldn’t let this insanely high valuation scare us off.

While buying TSLA at $1k would have been great, now that we are at $2k, people want to know what comes next.

First, this is a crazy volatile stock and we should be prepared for anything. While we’ve seen this huge surge higher, don’t forget markets love symmetry and spectacular moves higher are often accompanies by spectacular moves lower. With TSLA, we don’t have to go back very far to see examples of this stock collapsing more than 50%. And even a couple of weeks ago it was down more than 20% from its previous highs.

Because of this insane volatility, it makes a lot of sense to trade smaller sizes to limit our risk and to be ready to take profits proactively if prices violate key support levels. As I often remind readers, most of the people who hold this all the way up will also hold it all the way down. Please don’t be that guy.

$2k is our new highwater mark. The most adventurous speculator can buy this level if we see prices continue racing higher tomorrow, but keep a stop near $2k and be ready to abandon ship at the first signs of weakness. The thing about selling defensively is we can always buy back in if the dip proves to be a false alarm.

For anyone that is sitting on a 100%, 200%, or 300% profit, remember, we don’t make money until we sell our winner. We can continue riding this higher with a tight trailing stop, but given the size of the move over the last few days, it even makes sense to take a portion of your profits off the table proactively. Half of your profits guaranteed and half riding higher with a tight trailing stop is not a bad place to be. If prices continue trading well, we can always buy back in.

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