This Indicator Could Signal When Tesla’s Parabolic Surge Is Ending
Matthew Weller | Feb 04, 2020 02:31PM ET
There are certainly financial topics impacting more individuals and bigger companies, but there’s arguably nothing more fascinating happening in markets than the parabolic explosion taking place in shares of Tesla (NASDAQ:TSLA). CEO Elon Musk’s provocative electronic car company is perpetually creating headlines, but even against that backdrop, the stock’s surge is still astounding.
Below, we highlight a couple of the most fascinating statistics on the move:
- Tesla TSLA is trading up 115% year-to-date, 271% from the Cybertruck “bricked launch” in late November and 400% from the low set last June.
- At over $160B, Tesla TSLA has a higher market capitalization than rivals GM, F, FCAU and Daimler (MI:DAI) – combined!
- After this morning’s surge, Tesla (-$862M in “profit” last year) market capitalization has exceeded that of McDonalds (NYSE:MCD) ($6B in profit last year) and Nike (NYSE:NKE) ($17.4B in profit last year).
Source: TradingView, GAIN Capital.
So what’s driving the surge?
At the most basic level, the situation is a textbook “short squeeze,” albeit on an unprecedented scale. Midway through last year, approximately 25% of Tesla’s shares outstanding were sold short, meaning that traders were betting that they’d go down. As prices began to rise, some of those traders were forced to close their short positions and buy the stock back. This in turn pushed prices up further, forcing more short sellers to buy the stock, pushing prices to rise yet further and so on.
With any parabolic market move, the question isn’t whether it’s reasonable, but where it will stop. After all, in the words of the great John Maynard Keynes, “markets can stay irrational longer than you can stay solvent.” As of writing, 13% of shares are still held short, so there’s still plenty of fuel for further gains, even if the stock ultimately settles lower than current levels.
During this type of sentiment- and positioning-driven move, traditional forms of technical and fundamental analysis tend to lose their effectiveness, but one signal we’ll be watching for a sign that the rally is ready to reverse is the peak-to-trough drawdown. Since Tesla TSLA eclipsed its previous record high and started the true parabolic phase of its rally in mid-December, the stock hasn’t seen a peak-to-trough drawdown greater than 5% on a closing basis.
Get The News You Want
Accordingly, when TSLA does see a closing drawdown of greater than 5%, it will represent a change in the character of the move, whether that occurs later today or after the stock surges to $2,000. At that point, bears could have more confidence that a sustainable reversion to more sensible levels may be at hand. While this methodology is far from foolproof or guaranteed, it can help bullish traders limit their risk and allow bearish traders to potentially put the odds in their favor.
Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.