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Chart Advisor | Focus on the Price

By Gordon Scott, CMT

Tuesday, May 19, 2020

1. Stocks sell off late as congressman opines no new stimulus

2. High risk, high reward

3. Tesla on the edge

Market Moves

Stocks opened slightly lower but spent most of the day in positive territory slowly working higher. Then a U.S. congressman spoke. Minutes after Senator John Kennedy, of Louisiana, told reporters he thought there was less than a fifty percent chance that another stimulus bill would be passed, stocks began selling off. The S&P 500 index (SPX) went from trading nearly one-half percent above the day's opening price to a level one percent lower than the previous day's close.

The chart below displays a 5-minute chart that compares State Street's S&P 500 index ETF (SPY) with iShares Russell 200 index ETF (IWM) and Invesco's Nasdaq 100 index ETF (QQQ) at the end of the session today. The selling action looks pretty dramatic because there was an initial surge lower on the news, followed by 15 minutes of opportunity seeking traders buying the price back up. However, even those traders were overcome in the subsequent 40 minutes as more and more short-term traders headed for the exits. The bigger surprise is that price action wasn't even more dramatic. That being said, chart watchers will want to keep an eye out for tomorrow's early action to see if profit-taking and safety-seeking behavior are prevalent.

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High Risk, High Reward

When clean energy ETFs start outperforming the market even though more established energy companies are still struggling to get anywhere close to even for the year, you can be certain that investors are displaying a strong degree of opportunity-seeking behavior, a.k.a. bullish market sentiment. The promise of high profitability and market leadership for this industry segment has yet to be proven, so it remains a growth (and therefore risk-laden) opportunity.

The chart below compares iShares' Global Clean Energy ETF (ICLN) with three notable clean energy stocks, Enphase (ENPH), Tesla (TSLA) and Solaredge (SEDG). The key detail here is that all three stocks remain upward trending even as they outperform ICLN. Chart watchers will easily be able to interpret this for what it is: buyer optimism.

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Tesla on the Edge

Of the three stocks mentioned previously, (TSLA) shows a very interesting price opportunity (see chart below). The last time this played out, TSLA fell 50 percent, and recovered entirely within a 90-day period. The pandemic-driven panic obviously accelerated this process, but it may not be the case that the price action was unwarranted. During the flash crash of 2010, prices dropped dramatically in one day as news began to break about the Greek government's problems. What is important to remember about that moment in time is what happened in the days shortly after.

The first thing that happened was that the markets bounced right back. This seemed to imply that the price move was largely unnecessary and driven by poorly implemented computer algorithms. While that may be true, it is important to realize that in the month following, prices returned to the low of the flash crash, and a little lower still, before fully reviving. The lesson here is that moments of panic can reveal investor vulnerability.

It is possible that TSLA shares are vulnerable all the way down to $400 a share, the level at which they began to launch higher as investors re-valued the company as both a space-and-rocket company, not just an electric-luxury-car company. The opportunity to make money using put-options on TSLA (or simply buying the stock if it doesn't go down) is significant since the stock is likely to make a strong move in one direction or the other based on these diagrams showing similar Wolfe Wave patterns.

The Bottom Line

Stocks sold off late in the session after a pessimistic outlook about additional stimulus bills passing. If the markets care that much about there being no more stimulus, then risky stocks such as those found in the clean energy industry group may be vulnerable to price pressure. Specifically TSLA shares show the possibility of drastic price correction.