Time to get cautious on TSLA

When I first wrote about Tesla (TSLA) on April 4th, it was breaking out above $40.

Source: Stockcharts.com

Wow, you talk about a classic chart. After the gap-up breakout to $44 on high volume, price retreated back to the $40 level on receding volume before resuming its ascent. It's since been off to the races.

Earlier this month, the stock gapped up further on very high volume, but this time notably taking place on the heels of an already-impressive 35% move. And more recently shares have again gapped up on high volume. High-volume price gaps occurring well within a strong advance often suggest a near-term top is imminent. Note the parabolic chart pattern, the exponential rise in a fairly short time frame (150% rise in less than two months!). The recent buying looks to be climatic and emotion-driven.

This is not to say the stock is doomed or will fall off a cliff any time soon. In fact, such stellar performers typically do not die sudden deaths, but if/when they do correct it's more of a protracted, eventual decline. One reason for this is when high-flyers crack for the first time, many investors believe it's finally their time to get in, that they've been given a golden opportunity to enter before the next big move. Such buying tends to support the shares at the initial break, so again my point is these headline-grabbing stocks do not typically reverse and give up all their gains in a heartbeat. It's also too soon to tell if TSLA will even crack or meaningfully correct at this point.

Given what I've written, the stock is obviously not at a good entry point. However, for those already holding the stock, the prudent step at this point would be to establish a trailing stop-loss threshold, allowing price to dictate an exit. In the chart above, I included a few shorter-term moving averages. It appears as if the 10-day MA would offer the most conservative stop-loss limit at approximately $94, followed by the 15- and 20-day moving averages. 

Needless to say, even if you do get stopped out, one can always reassess and re-enter the stock at a later date. And who knows, maybe by then the company will have positive annual earnings....