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Tesla’s Wild Roller Coaster Ride

Tesla, the worlds largest electric car maker, has experience a wild rise, generating a short squeeze in its share price, that took the stock price from $418 on December 31, 2019, to more than $950 a share in the first week of February. After catapulting higher during January shares finally took a breather tumbling more than 17% following an announcement from the company that cars initially scheduled for delivery in early February will be delayed due to the outbreak of the new coronavirus. The catalyst for the explosion in volatility came in late January after Tesla reported better than expected financial results. The implied volatility of the shares has reached near historical highs, rising to 120%.

Tesla Beats on Top and Bottom Line

Tesla reported bottom line results of $2.14 per share on revenue of $7.4 billion. Expectations had been for the company to $1.74 per share on $7.1 billion in revenue. The company had gross margins of 18.8% compared to expectations of 18.3%. Q4 results increased relative to the Q3. Tesla reported that its full-year results for 2019 where the company lost $4.92 per share on revenue of $24.6 billion.

The volatility in the Share Price is Extreme

The better than expected results were followed by a 7% gain, which started the latest short squeeze. The volatility in Tesla shares saw the stock prices surge to $969 per share during the first week of February which seemed like a blow off top, as shares rallied nearly 22% at the highs of the session. A good portion of the move came from an extreme short covering.

According to S3 analytics short sellers accrued unrealized loses of more than 1.5-billion dollars in the wake of the earnings release. Tesla short interest after the earnings release were at $14.28 billion with 24.58 million shares, or around 18% of the shares that are outstand are shorted. Short sellers have cut their exposure by 1.78 million shares, or nearly 7%, over the last 30 days.

Tesla share trading volatility exploded after the car maker announced that it kept its Shanghai factory closed after the Lunar New Year following government guidelines. The outbreak of the coronavirus has kept people away from work. The extent of the delays is unknown. Tesla started to produce the Model 3 vehicles from its Shanghai Gigafactory to Chinese customers in January of 2020.

The Stock Price was Overbought

Tesla share trading exploded pushing the relative strength index, which is a momentum oscillator to an extreme. The RSI measures if the price of an asset is overbought and oversold by looking at the acceleration in the price of a stock over the past 14-days. The RSI on Tesla shares hit an all-time high on in early February at 96, on a scale of 1-100. Levels on the RSI above 70 are considered overbought while reading below 30 are considered oversold. A reading of 96, is very extreme which also led to the volatility in Tesla shares.

Take Away

Tesla shares have increased more than 100% in 2020, driven by momentum and an intense short squeeze. The blowoff top on higher than normal volume, means many of the trader’s that held short position are likely out of the stock. Prices will now look for an equilibrium level and consolidate after a massive move higher. The better than expected financial results likely places a floor under the shares of Tesla.

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