How To Trade Tesla Stock Heading Into Q1 Earnings: Charting The Path Ahead

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Tesla, Inc TSLA was trading down 4% on Wednesday, as the company heads into its first-quarter earnings print after the market close.

When Tesla printed a massive fourth-quarter earnings beat on Jan. 26, the stock plunged over 11% the following day and fell an additional 4% on Jan. 27.

For that quarter, Tesla reported revenue of $17.7 billion, which beat the $16.4 billion consensus estimate. The company reported earnings per share of $2.54, beating a consensus estimate of $2.26.

For the first quarter, analysts, on average, estimate Tesla will report earnings per share of $2.26 on revenues of $17.8 billion.

From a technical analysis perspective, Tesla’s stock looks bearish heading into the event, having settled into a possible bear flag pattern on the daily chart. It should be noted that holding stocks or options over an earnings print is akin to gambling because stocks can react bullishly to an earnings miss and bearishly to an earnings beat. Options traders particularly, those who are holding close dated calls or puts, take on extra risk because the intuitions writing the options increase premiums to account for implied volatility.

In order for options traders with short-dated calls to profit from Tesla’s potential run higher or drop to new lows, the stock will need to move more than 6%, which is the implied move institutions have priced into the calls and puts. If Tesla reacts less than that percentage, the premiums will drop on Thursday and the options are likely to expire worthless.

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The Tesla Chart: On Wednesday, Tesla was working to print a bearish engulfing candlestick within the flag of a bear flag pattern. The downward sloping pole of the pattern was developed between April 5 and April 11 and the flag has been created over the trading days that have followed.

  • If Tesla suffers a bearish reaction to its earnings print and breaks down from the bear flag pattern, the measured move is about 15%, which indicates Tesla could drop toward the $880 level. It should be noted that if the stock reacts bullishly to the print, the bear flag will be negated and the uptrend within the flag will become the dominant pattern.
  • The move lower on Wednesday was on lower-than-average volume, which likely suggests there is a lack of traders and investors wishing to take a position prior to earnings. The volume that does exist is bearish, which indicates there are more traders exiting their position prior to the earnings release than buying the stock. At press time, about 17 million Tesla shares had exchanged hands compared to the 10-day average of 21.46 million.
  • Tesla has a gap above between $1,079 and $1,087.30. Gaps on charts fill about 90% of the time, which indicates the stock is likely to trade up into that range in the future. The top of the gap is about 11% above the current share price.
  • Tesla has resistance above at $1,045.02 and $1,075.02 and support below at $978.60 and $945.

See Also: Tesla Hires Geologist: What Investors Should Know