Today I want to talk to you guys about something that’s all the rage right now, which is Tesla.
Tesla has had the most insane run over the last few weeks, and I'm here to explain to traders what happened, and how common that type of pattern is in the penny stock markets.
Here’s a quick breakdown of how Tesla has been traded.
Let's look at how it's been traded from around 2018 up until last December.
I think it triggered off somewhere in the $200 range, and in 2019 it got up to about $400.
At the end of 2019 when I was looking at it, I thought it was moving pretty steadily. If you look at the overall pattern, you’ll notice a small but steady progression upwards.
Now, for some reason, between December 2019 and the end of January 2020 it shot from $400 all the way up to $800.
Nothing crazy happened.
However, two important things did happen.
Two major catalysts happened, one we can find through a technical analysis, one through fundamental analysis.
In our technical analysis we’ll note from the charts that there are some crazy technical breakouts, like a supernova, the charts are going way up.
From the fundamental analysis, you’ll learn that Elon Musk invested some of his own capital in Tesla.
So, the first catalyst was the positive earnings, and the second catalyst was Elon Musk funding his own company showing signs of good faith.
And so those are the two fundamental catalysts that helped the stock price. But it wasn't anything to do here that actually caused Tesla to go up.
Let me explain what happened with Tesla and why this happens in penny stocks and how you can profit off of it anytime it happens.
This happens to at least one penny stock a day.
Tesla is a very highly shorted company, which means that there's a lot of traders out in the market that are benefiting from putting short positions against this stock.
They think that the prices overvalue, that Elon Musk is crazy and that the tactics and the lack of profits are going to cause the company to eventually collapse.
They are working the stock market dreaming that Tesla crashes and goes down.
However, what happened when this stock price started going up was that these short traders sold a bunch of $400 Tesla stocks, assuming that at $300 it would make them a profit and then go down.
Well, the problem here and the problem that happens all day long in this market is something called a short squeeze.
This a very important terminology to understand because if you want to get into day trading or successful trading in any fashion, you're going to see this short squeeze all the time.
Back to the Tesla scenario.
Tesla was at $400 and there were a ton of short triggers for the traders, and I'm not talking about retail traders.
I'm talking about billions of dollars of hedge fund money invested against you by those who think it's going to collapse.
What starts happening once the stock price starts going up, is that people get scared because they’re losing money.
In the same way that people like you and I would want out if the stock price starts to dip, so did these guys.
We all want to cut our losses and sell right away.
And what happens when they buy is that the stock price will go up, and that's what's called a short squeeze.
They now have a larger and larger deficit. And so, they close out their positions, but it triggers a ton of biceps and that triggers the stock to go up.
And it shows a vicious chain reaction because as the stock price keeps going more up, more short traders get scared, they cover by buying and that triggers a price up again and it triggers more people.
And it's just a cycle. And that's how in the span of just a few weeks, Tesla went from $400 to $800 for no damn reason.
The short squeeze is super important to understand because you need to be able to recognize the different variations of the market.
You also have to keep in mind the psychology of the people who are holding the stock because this short squeeze type of game happens all the time.
I would definitely recommend re-watching this video or re-reading through this post because it might take a while to understand it all.
The second you start understanding this concept, you'll have a much better understanding of the stock market as a whole.