Tesla (TSLA) stock is rallying off its lows after suffering a 40% draw-down — its worst decline since the COVID-induced sell-off one year ago pulled it down more than 60%. But one trader is saying it's too early for short-term investors to wade back in.
"[Tesla] is a fan favorite out there for many investors... [A] lot of people love the company, love the story here with Tesla, and may be tempted to say, 'Hey, Tesla has come way off of those highs. Maybe I should buy the stock on sale here.' But we would caution against that," Alissa Coram, multimedia content editor at Investor’s Business Daily, tells Yahoo Finance Live.
Coram looks to market technicals for cues, pointing to the prior breakout from a months-long consolidating pennant formation. "[If] you rewind the clock to last November, that strength out of a little consolidation there, over the 466 level —we would have considered that definitely an actual entry for the stock. [It] went on a huge move after that," says Coram.
After the strong move, Investor's Business Daily warned traders who had bought the prior breakout that it might be time to book some profits in early January. The expanding volatility (or daily trading range) of Tesla stock tipped off astute watchers of Tesla's stock price action that there might be trouble on the horizon.
Coram notes the climactic action in early January as the stock gapped up, opening above the prior day's high, three days consecutively. She also points out how the stock was getting extended from its various moving averages.
"[It] was at that point that we were warning investors: Maybe you want to take some profits into this strength if you were buying out at 466 area, or even earlier in the big move that we saw in 2020. It then started to trigger some more sell signals as the technicals broke down, first breaking below that 21-day moving average. That would have been another spot to take profits," she says.
Coram highlights the importance of the 50-day moving average, which is also the 10-week moving average — an important institutional reference point. "When we see a big break of the 50-day line, or the 10-week line on a weekly chart, our research shows that it's at that point that stocks that have made big moves really need to take a break, at the very least. We've seen huge volume declines, and the stock is now hitting some resistance at that 21-day moving average, potentially living below that level... [W]e think Tesla needs some time here, so avoid that temptation of thinking the stock is on sale here," she says.
For longer-term investors still sitting on large, multiyear gains, Coram says they can treat Tesla stock a little differently and allow for more breathing room. "Tesla could surge to new highs and keep climbing, but it also could be dead money for a while," she tweets. "We'll have to see!"
Jared Blikre is a correspondent focused on the markets or Yahoo Finance Live. Follow him @SPYJared