Sizing Up Current Events Against Tesla Trades
By: Geoff Schiffrin
News is the lifeblood for most traders.
How quickly it can be disseminated, received and digested can go a long way for our P&L.
Understanding what to look for and the difference between micro and macro events can easily make or break a trading idea.
If a negative news item is released when the market is closed, a “panic selling” usually happens when the stock reopens and before calmer heads can prevail. Most likely you will see a gap down as investors, both big and small, flee the stock because they do not want to get caught in the wave of negativity that they feel is about to happen.
Now the trick is deciphering whether or not the news has long term implications. Let's look at a few examples.
One only needs to look as recently as Monday, June 10. The weekend prior, Barron's published a negative article on Tesla (NASDAQ: TSLA). A contributor made the point that the batteries Tesla uses have a few problems.
One is that the people who buy their $90,000 car are usually the clientele that trades in their cars frequently but that the batteries will need to be replaced and at the current price point, too expensive for the next owner to do so economically.
The second problem also revolves around Tesla batteries. In order to keep up with analysts expectations, it would need to sell a mid priced car, namely in the $30,000 to $40,000 range. Again, with the battery prices where they are currently, a lesser-expensive Tesla car is likely impossible to produce.
So, Monday morning trading opened and Tesla stock gapped down roughly three percent, following the panic selling outlined above. But it didn't continue.
It found a nice bottom in the first 30 minutes of trading, rallied to erase all the loses and then finally settled to close down two percent on the day.
Currently, the stock is right back to where it was before that negative piece came out. Namely because the company was quick to respond - and most recently, on June 20, announced a plan to establish not only a recharging station, but a swapping station as well, making it easier for people to trade in their used batteries.
What can be looked at as long term? A bad 10-Q filing or if research doesn't add up will have the same immediate effect as what was stated above along with long term follow through. A short seller with a track record of being right coming out and declaring his position with information to back it up will also affect the stock long-term.
For an example of that, let's go back two years to January 30, 2011, when the reputable research group Citron Research issued a report on the Nasdaq stock China Media Express (OTC: CCME)(OTCC: CCME). Shares currently trade under a dime on the pink sheets. When the report first happened however, CCME was trading above $10.00. Click here to see the original report.
Just like the Tesla article, it is filled with data, numbers and in-depth research. The only difference is now being able to look back and see how history played out.
There was plenty of time to sell a current position or to start a new one because it took three months before the stock was halted and the rest as they say, is history.
Will the Tesla news turn out to be long term negative or a short term bump in the road? Is Tesla being held up by short covering? As a trader, it is imperative to be open to all possibilities and to arm yourself with as much knowledge as you can. Only time will tell.
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