Some of the most powerful setups and the quickest moves in the markets come from when sentiment just goes from really terribly bad to just bad. This typically occurs as an equity price starts dropping precipitously, often integers at a time. I am going to highlight a scenario that shows how violent this price action can get and how you can potentially profit on that sort of paradigm shift.
In many of the above cases, the equities in question often undercut support and fish out “weak hands.” The reversals on these fishing trips are quite ferocious. More often than not, they are caused by a catalyst that spark Johnny-Come-Lately’s to headline chase. In those cases, the late sellers/trend followers are absent of the previous move that led to the downfall and are focused on the recent break regardless of whether or not the preceding break was 10-20-30%. For clarification’s sake, I’m not absolved of being one of those “Lately’s” as there are times, though sparing, where I am guilty of the same mistakes.
I want to highlight the above phenomenon in action using TSLA as the prime example. Last Friday, the 7th, TSLA broke down on the back of the Joe Rogan podcast that featured Elon smoking pot. It was followed with news that two TSLA execs were leaving the company. The stock was bludgeoned in the premarket and continued to crack shortly there after once the bell rung. The bleeding quickly accelerated in the first 10 minutes of trade as its multiyear trend line was snapped and sellers dumped their shares. It subsequently hammered off of ~250 support and closed below trend but the sellers appeared to be exhausted.
Monday morning the stock gapped back above the aforementioned trend. It continued to hold the trend line and even made a run at breaking the one month downtrend it had been in. Tuesday morning that attempt was shot as the stock was downgraded. It once again made an attempt to break its trend line and failed to do so. (As highlighted below)
As a rule of thumb when a stock stops going down on bad news, or going up on good news, a near term paradigm shift has occurred. In that instance it is important to pay attention to price action and understand the levels for the stock. In TSLA’s case, the stock closed above the 5EMA yesterday for the first time in over two weeks and was wedged between the 5EMA and the downtrend it started on the back of “Funding Secured.”
Lets recap, in the case of TSLA the following had occurred:
Break of trend on catalyst
Had a false breakdown reversal after fishing out weak hands
Gapped up and reclaimed trend line
Held trend line tests
Closed wedged between its 5EMA and downtrend
With the above mentioned, TSLA was on my “Long Radar” today.
This morning, TSLA gapped above its downtrend that it started back on August 8th. As I’d mentioned above, TSLA was already on my “Long Radar” given the five reasons I outlined above. In that case, I planned to stalk TSLA and go long any sort of confirmation the stock gave me as an indication of the trend break being for real.
Initially, the stock retested the trend and held which gave me a clear sign to get long the stock on an opening range breakout. Specifically, I was looking for a break of the mornings highs as my indicator (highlighted by pink arrow and trade below).
As the above shows, the stock really took off once the highs of the session were taken out. This occurred as those who tried to push the stock (back) down were now on the wrong end of the trend and short sellers likely were squeezed out of their positions. Specifically, the 280 level was important for the stock as that is where the precipitous breakdown started Friday morning. With those confluence of events, it was prudent to get long the stock and it surely paid to do so.
In the case of TSLA, in order for the stock to continue it just needs to hold the recent downtrend breakout level. So long as it does that, the stock CAN revisit 300 and then subsequently the 317-320 zone.
Personally, I find that this setup, when timed appropriately, is very powerful and works wonders. I will leave you with this nugget below as it has all the makings of a potentially similar move.
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