Shares of Tesla Inc. (TSLA) have had a tremendous run… But I’m going out on a limb to say November of 2021 will go down in history as the blowoff top for TSLA shares.
That doesn’t mean the stock will sell off sharply. And it doesn’t mean investors and traders can’t make profits with the stock in the weeks and months to come.
But after two years of phenomenal growth, it’s reasonable to expect that Tesla’s rally is over.
A Parabolic Run and Blowoff Top
It’s hared to overstate just how powerful the 2-year rally for TSLA has been.
Coming into the beginning of 2020, shares of TSLA were priced just above $83. Last week, the stock topped out above $1,243 per share — good for a gain close to 1,400%.
A truly astounding run, and a great opportunity for investors to capture tremendous profits!
While I’ve had my doubts about the company’s ability to grow into its near $1 trillion market cap, I’m thankful to have booked some profits along the way.
As traders, we don’t always have to believe in the narrative… Instead, we can profit from the trend while managing risk to make sure we’re not hurt when that trend ultimately shifts.
Take a look at the parabolic run over the last two years and you can probably see why I think Tesla’s rally is over.
Traders call this type of move a “blowoff top.” Understanding the psychology of how a stock surges can help explain what might happen next.
FOMO Leads to Buying at ANY Price
Stock traders often fear missing out when big popular stocks surge. This can be especially true for institutional investors whose jobs depend on outperforming the market averages.
If you were a professional money manager and you didn’t buy shares of TSLA, it would have been extremely difficult for you to keep up with the performance of the S&P 500. And that meant you could have lost your job! (Or lost many of your clients.)
So even though TSLA is very expensive compared to earnings and just about any other reasonable metric, investors are essentially forced into buying this high-performing stock just to keep up.
As more of these investors decided to “hold their nose and buy” shares continued to surge higher. It became a self-fulfilling cycle that led to even more pressure for buyers to step in and own more shares.
That is until the stock had its blow off top this month and started pulling back.
Now, shares of TSLA are trading for about 123 times expected profits for next year, and at about 98 times profits for the year 2023.
That’s extremely hard to justify from a fundamental standpoint.
And without strong momentum, institutional investors can’t use FOMO as a justification for owning shares.
If these investors start unwinding their positions, the decline in TSLA’s shares will cut into retail investors’ enthusiasm. At that point, all bets are off.
Shares could make a bee-line for more reasonable valuations. A 40X multiple times 2023 earnings (still a very rich valuation) would put TSLA’s price near $420. (Remember that price point??)
Some TSLA Chart Levels to Watch
Even though I think Tesla’s rally is over, there are still opportunities to make money from the stock.
First, bullish investors and “true believers” will try to make a stand at some point and defend the stock’s slide. The first logical spot for that to happen is when TSLA pulls back to the 50-day average (currently close to $900).
The 50-day average is the green line in the chart below.
If TSLA bounces off the 50-day average and re-tests the $1,200 level, that would give traders a 33% profit. Not bad!
And if you used option contracts to manage risk and increase potential gains, your percentage returns could be even greater!
Another potential area of support is $550. This is the same area where TSLA found support this spring after the first half of its parabolic move. Of course it’s a long way from today’s price to the $550 support area.
Buying shares at either of these levels could be a great idea. You could lock in profits as the stock rebounds (even within the context of an overall topping process for the stock).
Of course you could also consider buying puts on TSLA to capture profits as the stock moves lower.
My personal preference is to buy in-the-money put contracts which give you some advantages for managing risk and still magnifying your profits.
We’ll talk more about choosing the best option contracts in a future alert. For now, just know that it’s likely TSLA’s rally is over and it’s time to start thinking about how to manage risk with this expensive stock.