TSLA: Time to Sell

As they say, all good things must come to an end. After the close yesterday, Tesla (TSLA) reported what appeared to be better-than-expected earnings, but investors disagreed and the stock is off about 10% this morning. 

TSLA was the subject of one of my first posts on this blog, entitled "Tesla: Earnings, Smernings!" I highlighted several bullish items for TSLA, not to mention a classic breakout from a base on high volume. With periodic follow-on posts, trailing stops were discussed as being appropriate and prudent.

With today's action, I believe taking gains are in order.

Source: Stockcharts.com

The chart above highlights my April 4th bullish blog post (green circle) when the stock price was $44. TSLA soared to a peak of just beyond $190 before breaking the uptrend and working lower since late September. Note the 50-day MA was never breached until last month. I've also plotted the 10-day and 20-day MAs with the 10-day MA recently plunging through both the 20-day and 50-day MA, and the 20-day MA getting below the 50-day MA as well -- first-time occurrences since early April and clearly an indication of potential trend change (down). In addition, with the April breakout note the RSI (upper inset) remained above 50, frequently eclipsing 70, a bullish condition, and yet last month the RSI broke down through the 50 threshold and since then remained more/less sub-50 -- bearish.

With today's gap down in price, I wouldn't be surprised to see TSLA enjoy a brief relief rally. Such high-momentum stocks with great fanfare typically do not fall off a cliff overnight. Rather, during moments of abrupt and significant weakness, many view the price decline as an opportunity to enter the high-flyer stock at a steep discount, driving the share price north. But very often such a rally is anemic and fleeting as many holders who have ridden the stock higher for months (smart money?) look at this bounce-back in the stock as a good time to dump the shares given the previous gap down or weakness, and the stock resumes its descent. That doesn't have to happen in this case, obviously, and may not, but in my experience I've observed it happening quite often and I prefer to be on the side of prudence and risk control. One can always re-enter the stock, and frankly a relief rally doesn't have to occur at all and the stock could just head lower from here.

The bottom line is after what peaked at a 335% gain when the stock was hovering above $190, I would have no problem settling for "just" a 260% increase today. It should always be about discipline, risk control and letting the stock (i.e. price, volume, indicators) tell you when it wants to be sold.