Bitcoin jumped over 20% on Monday after Tesla’s most recent SEC filings revealed the electric car maker had purchased $1.5 billion worth of the cryptocurrency. The Palo Alto-based EV manufacturer said it had acquired the digital currency for “more flexibility to further diversify and maximize returns on our cash.”
What that vague, loaded language could actually mean is that Tesla (NASDAQ:TSLA) purchased Bitcoin as both an investment, as well as for added liquidity, since the company said it would accept the alt-currency as a form of payment for its products.
Of course, it may not be a coincidence that recently, Elon Musk has been promoting cryptocurrencies, including Bitcoin and Dogecoin. Now, some are warning that the SEC will investigate Musk’s tweets to his 46 million followers on Twitter, supporting the digital currencies. The Tesla CEO has egged on his followers in 'Reddit Rebellion-like' fashion, with relevant memes as well as by making what seem like pseudo-promotional statements in interviews, such as:
“I think Bitcoin is on the verge of getting broad acceptance by conventional finance people.”
It’s almost as if Musk is flipping the bird at the financial establishment, defying not just the long-held belief that Bitcoin is not a viable investment platform but that it’s most certainly not a store of value and can’t be used as money. Is Musk just a corporate bad-boy who delights in yanking the SEC's chain (as he's done in the past)? Or does he have a separate agenda?
Legendary investor Michael Burry, who shorted the US housing market ahead of the 2008 crash, thinks so. He believes Musk's crypto chatter is nothing more than misdirection. According to Burry, the Tesla CEO is simply diverting the market's attention away from the fact that Chinese regulators are investigating Tesla for customer complaints about quality issues.
Right now, Tesla's Shanghai factory is the only 100% American-owned manufacturing facility in China, a feat pulled off during the US-China trade war. Sales in the Asian nation doubled in the past year, with Sino-based purchases now about one-fifth of Tesla sales.
As all of this plays out, investors in the stock are on hold, waiting for additional developments to signal where shares may be headed next. This indecision is visible on the chart.
The stock has been trading within a falling flag, bullish after the preceding 44% surge. The price is currently struggling to remain above the uptrend since the November low.
The downward tilt has presumably been created by profit-taking, though the price remains within the range because of new buyers. An upside breakout would complete the pattern, with the implied $270 from the point of breakout, repeating the near-straight line up before investors punched out in mid-January. That occurred after Chinese internet giant Baidu (NASDAQ:BIDU) announced it planned to develop an EV with local carmaker Geely Automobile Holdings (HK:0175).
However, the month-old flag is aging and may lose its vigor if disgusted bulls unwind positions. Still, since Feb. 2, the price developed a pennant, bullish after the preceding near-13% move, whose upside breakout would target the same follow-through, while serving as the catalyst to finally complete the even larger flag.
Trading Strategies – Long Position Setup
Conservative traders should wait for the pattern's completion, whose upside breakout would trail above the Jan. 25 all-time high, followed by a return-move demonstrating support.
Moderate traders could go long after a penetration above $890, with at least a two-day filter in which the price remains above the flag.
Aggressive traders would get out ahead of the crowd by trading off the pennant bottom, provided they understand and accept the risk of jumping the gun and have a trade plan in place that reflects that.
Here’s an example:
Trade Sample – Aggressive Long Position
- Entry: $845
- Stop-Loss: $830
- Risk: $15
- Target: $1,000
- Reward: $155
- Risk:Reward Ratio: 1:10