Thinking about shorting $TSLA? Thinking about goin long $TSLA? Well here’s the long and the short on Tesla ($TSLA) (February 22, 2021)
TSLA SPY MDY IWM DIA IYT QQQ TSLA SHOP TSLA
Tesla ( NASDAQ: TSLA ), a big breakdown below the 50-day moving average, and it was on volume, pretty heavy volume. So what do we do with this stock? Ten days ago, the Friday before last, I had been talking about how to short a stock like this, basically, just any short.
What you don’t want to be doing is calling a top. You don’t want to be predicting a top on a stock like this. There are a lot of folks that are a heck of a lot smarter than you and me who have had their heads handed to them by trying to pick a top on Tesla ( NASDAQ: TSLA ). I’m sure you know this and so we are not going to do that, haven’t done that at all. I have always said, just respect the trend. A lot of times, most times it lasts longer than you think it will.
Now, today I put this into our Strategy Session to help our traders get set up for tomorrow. But today I mentioned that the S&P ( NYSEARCA: SPY ) is still within trend. MidCaps ( NYSEARCA: MDY ) is still doing okay. This ( NYSEARCA: IWM ) is doing okay. This ( NYSEARCA: DIA ) is doing okay. This ( BATS: IYT ), a new high so it’s all good; until you get to the Nasdaq 100 ( NASDAQ: QQQ ) and now that’s not so good.
So there are a few chinks in the armor here with respect to this bull market. I look at the Nasdaq and some of the stocks that are down today, decisively, this is kind of a big deal; we’ll get back to Tesla ( NASDAQ: TSLA ) in just a second. I noticed that Shopify ( NYSE: SHOP ) reported after hours and it’s down a bit on a secondary. That’s not that big of a deal, if my stock was up like this has been for the last year I would be selling more shares too, and say thank you very much.
Frankly, I don’t know why Tesla ( NASDAQ: TSLA ) didn’t do that all of the way up, people would have still bought the stock. We are seeing some of these high-fliers start to roll over. You can look at Amazon ( NASDAQ: AMZN ) and see the same thing.
So how do we take advantage of this and short the stock? Well, what I was describing back then is, a lot of times people look at this type of thing and say, oh, a breakdown of the 50, I’m going to short, so they short right here. Maybe at the first part of the day and that’s fine. But maybe you look at this and say, alright, I’m going to short this stock because it’s a big trend break.
Well remember, uptrends last longer than you think, and how many times have you seen, certainly on Tesla ( NASDAQ: TSLA ) but just on stocks in general, where they break down, they break down and then they suck in all of the shorts and then they run back up again? It’s called a bear trap, where people see the stock, they rush to sell. They short the stock but it’s like I have to liquidate my positions and then once they do that a lot of times you will see these buyers coming in.
Hey, this is Tesla ( NASDAQ: TSLA ) and a lot of people look at this as a great buying opportunity, and maybe it will be. I don’t know, neither do you. If you are a “Teslonian”, you’re a musketeer, you think Elon Musk is like Tony Stark only a lot smarter, then you think this is the mother of all buying opportunities and you’re in.
Again, you may be correct, you may be correct, I am not saying anything to the contrary. But on the other hand, if you think that Tesla ( NASDAQ: TSLA ) is overvalued, etcetera, etcetera, you’re going to sell this stock, you may even short it. But then if the stock starts to rebound those that think Musk is a smart Tony Stark, they are going to be piling in and that is going to push the stock higher. At the same time, those that thought Tesla ( NASDAQ: TSLA ) was overvalued, they see the stock start moving, they go, oh crap, I sold too soon, and they are going to be buying.
That leads me to this important point about shorting. You don’t short the first break. You short the first failed attempt to get back above that breakdown. I shorted Tesla ( NASDAQ: TSLA ) today but it was only for a day trade, it was literally for an hour and a half, and then I’m out because this is my preferred method of shorting it. It’s not the only way but this is one that Mark Minervini uses too; you get a stock that has broken down and when it comes back to test the breakdown, that’s when you short, right? Wrong. No, it’s when you watch it.
And then once the stock starts rolling over, if the stock starts rolling over, that is when you short the stock. You are shorting the stock right here and the reason why that is a good place to short it is because it’s back very close to where it broke down and it is giving you evidence that that breakdown is truly a breakdown, as opposed to just a sell-off that is going to be recovered. And so your, oh crap I’m wrong level is very close to where you shorted. So you’ve got your entry here, your buy stop there, which is a heck of a lot better than shorting the stock down here. And then where are you going to keep buy stop? You still have to have it here.
Just remember, any fool can short a stock when it breaks down but there is more to shorting than just shorting a stock when it breaks down because a lot of them recover. If they didn’t recover then wouldn’t trading be pretty easy? And if they didn’t recover there would be no uptrends, there would just be stocks that scream from zero to infinity in a day.
You have to have a process that works for you and then you have to follow that process flawlessly. If you don’t you are just an action junky and you are slinging stocks around. And that’s fine, there is nothing wrong with that as long as you know what you are doing, but you are not trading, you are a stock enthusiast. So don’t be an enthusiast, be a pro.
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