After a horrifying 2022, Tesla (TSLA) had a huge start to this year.

From its January low, the electric vehicle (EV) company rallied a massive 110% in just over a month.

Then after drifting lower, TSLA rallied again.

As part of the AI boom, TSLA surged from late April right through the middle of the year.

By the time it topped out (along with the Nasdaq Index) on July 19, TSLA had almost tripled from its January low.

But since then, TSLA has dropped, swinging in between a series of lower highs and lower lows.

That exact scenario can set up some great trading opportunities. And we recently enjoyed a solid win with members of my options advisory, The Opportunistic Trader.

In just four days, we generated an 82% gain.

What’s more, we did so using a counter-rally trade against the prevailing downtrend.

So let’s see how we did it…

Overdone Selling

In the chart of TSLA below, you can see the clear diverging pattern (left orange lines) that led to TSLA’s reversal.

When buying momentum falls like this (left lower orange line), it will pull the stock lower over time.

And that’s what we saw. TSLA’s downtrend got going:

Tesla (TSLA)

Source: eSignal

The relative strength index (RSI) fell all the way from overbought to oversold territory (gray dashed lines) as well.

Then in mid-August, a V-shaped recovery in the RSI saw TSLA rally up to a lower high.

But momentum reversed yet again, and TSLA slipped to a lower low.

Then the August RSI pattern repeated in late October. This caused TSLA to bounce yet again.

But it wasn’t just the RSI climbing out of oversold territory (right orange line) that provided the setup for our trade…

Over the previous month, TSLA had plunged 19% – the worst performer of the Magnificent 7 (Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia, and Tesla). Most of the other six were trading around breakeven levels (or better).

Plus, TSLA had filled in its gap from November 1, meaning that the selling was likely over.

So on November 9, we entered a long TSLA trade by buying a call option. (Note that a call option should increase in value when the underlying stock rises.)

And as the chart shows, the trade went our way right from the start.

Take another look:

Tesla (TSLA)

Source: eSignal

TSLA closed slightly higher the following day.

Then after the weekend, TSLA rallied strongly on Monday. That sent the value of our call option soaring.

With our position in good profit, we decided to close it out that day for an 82% gain. All up, the trade took just four days.

As always, we used options to generate this outsized return in such a short period. Had we just bought TSLA shares, our profit would have been smaller.

But by being nimble and sticking to our proven mean reversion strategy, we made a very tidy profit here.

Regards,

Larry Benedict
Editor, Trading With Larry Benedict

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