Some traders/investors make the mistake of studying markets instead of trading. This can negatively affect your trading performance. More specifically, this certainly was the case with the recent down move in battleground stock TSLA, the growth stock. For those of us who have traded professionally for 15plus years it is hard to watch and read the nonsense about TSLA’s valuation. We are professional traders who have studied trading and not markets. This is an enormously important distinction. Let’s discuss.

People have been trying to make a name for themselves in finance, tripping all over themselves with the Short TSLA Idea because of their fundamentals. They are very interesting and smart people giving very convincing arguments. Heck, they may even be completely correct about TSLA’s fundamentals. And this all makes for interesting reading. There is just one problem with all of this for the pro trader/investor. Who cares? What does this have to do with trading? (HT @steenbab) All of that fundamental analysis, in this specific case with TSLA, is what I call the study of markets. What should stocks do? What companies are better than others? PEP is better than KO. WMT is better than TGT. None of that has anything to do with trading.

The distinction between studying markets and trading cannot be more concrete than with TSLA. In one corner you have the fundamentalists screaming to short. And again this are very bright people with compelling reasons to support their thesis. In the other corner you have the traders, understanding the most singular fact about TSLA at this present moment: TSLA is a growth stock. Traders who study trading have learned the patterns for growth stocks. If you’ve been a student of trading this is what you have learned: GROWTH STOCKS DO NOT TRADE BASED ON FUNDAMENTALS. This is a trading fundamental that you learn after shorting stocks like TSLA and getting ripped. Massively ripped.

Look I have done this (perhaps 14 years ago). Then you learn and find ways to get long the TSLAs, stay long the TSLAs and ignore those who have not yet learned this lesson but are about to. They can go on TV, write articles, tweet nasty things about those of us who have been playing this from the long side, but if you continue talking about TSLA’s fundamentals you have not studied trading. One day these facts about TSLA’s fundamentals will be relevant but they aren’t now.

I must give a shout out to Jon Boorman for his trading expertise in TSLA. One day last month after a GS downgrade TSLA tanked. It broke my technical trendlines. I got beat up on that first day buying into 115 technical support. At the end of the day, I wondered if TSLA had changed. I started thinking, studying some charts, and seeking other opinions. One was that of Mr. Boorman, who wrote a wonderful post on the price action of that day on TSLA. As a longer term trader he felt the price action, while painful for the longs, was still not indicative of a reversal. It was incredibly helpful as a short-term trader to learn the levels he was watching. From his seat we were still a good 15 points away from a technical breakdown.

What happened after he posted his piece? That very next AM TSLA pulled back in to 105, near one of Mr. Boorman’s key areas and has traded 50 points higher since. You know what I will just let your read what he wrote. This is an example of terrific work done by a pro veteran trader. This is an example of a trader who studies trading.

It was quite a day in TSLA. After a negative analyst report from Goldman the stock slid 14%. Never mind that this is the same analyst who downgraded the stock in May at $55 and has watched the stock move 140% against him. Those that don’t have stop losses or accountability, or simply have an axe to grind will take their victories any way they can. The shorts had their day in the sun too. Here’s where we stand:

As trend followers we have no bias. We don’t get wed to a position or take sides on the issues that surround it. Our only loyalty is to our process. We argue on the side of price and trends, whether they support higher or lower prices. We don’t discriminate. We will go long or short anything that meets our criteria without prejudice.

Tesla (TSLA) 5/28 +7.4%

That’s one big down day, 14% on 32m shares, the biggest since 5/14, two weeks before we entered long. In fact, the 5/14 move was arguably of greater significance, a $16 range coming on the heels of an $87.80 close.

That’s an important factor in understanding why we’re still in.

If this was Johnson & Johnson (JNJ), steadily stair-stepping higher and it suddenly had a 14% down day on massive volume, I’d have no hesitation in exiting regardless of where it was in relation to its MA’s. That’s a volatility or ATR stop. It tells you something’s changed, its behavior, its character, however you want to portray it, it’s not the stock it was yesterday or when you entered.

With TSLA, it would be very hard to argue that. It’s exactly the stock it was yesterday and when we entered. This kind of volatility was within our expectations. We entered after it made a new closing high and even had to contend with a gap move above $100 at the open for our entry. We stated at the time we would need an initial stop 20% away in order to play this name. The price we pay for a wider stop is a smaller position size. We did all that knowing full well the volatility that could follow. And we’ve seen it play out within those expectations ever since.

So where do we stand now?

Let’s clean up the chart taking off the MA’s and the volume, and just concentrate on price and trend.

There’s a confluence of daily and weekly closes that we highlighted earlier today in the $110.33-104.68 range. A break of this is where the uptrend comes under severe pressure in my opinion. It also coincides with the ascending trendline of the closes since 5/14, and the intraday lows.

The real line in the sand however is that 6/21 daily and weekly close of $99.55. The significance of it representing a return to double figures will not go unnoticed either. A close below there and the intermediate uptrend is over.

You can be better tomorrow than you are today!

Mike Bellafiore

One Good Trade

The PlayBook

Mr. Bellafiore is long TSLA