Tesla Rolled Over, and Where it Goes Next is More Important than You May Think

Shah Gilani|September 11, 2020

I’m not the kind of guy to say I told you so, but if I was, I’d sure be saying it now.

That’s a joke, kind of. Because I did tell you that Tesla was the poster boy for irrational exuberance and “that one stock is a bellwether for the entire market.”

I told you that on Friday, August 28, 2020, right here in Total Wealth in an article titled “The First Bellwether You Need to Watch to Avoid a Portfolio-Wrecking Loss.”

When Tesla rolled over, when it “corrected,” meaning fell 10%, that was the bell ringing out its warning, that was the time to make sure your stops were locked and loaded, that was the turning point for the market.

As a bellwether it worked perfectly. Tesla hit an all-time high on Monday August 31, two days after I said to watch it. It was up a remarkable 495% in eight months. The next day it fell 4.66%. The next day, Wednesday, as the S&P 500 and Nasdaq Composite were making all-time highs, Tesla fell another 5.82%. The warning couldn’t have been any clearer or louder, while markets were making new highs Tesla was down 10% in correction mode.

We know what happened the next day…

Markets puked.

So, What Now?

Keep watching Tesla, if it can stay above $370 there’s hope for it and the market.

If TSLA falls below $370, especially if it breaks through there, hard and fast, it could trade down to $275. And if it gets there, it could collapse to $200 just as easily.

Keep watching Tesla, but now that it’s done its primary job, being the first bellwether to sound the irrational exuberance alarm, it’s time to watch the FAANMG stocks more closely.

I gave you support levels for them in a follow up article to the Tesla bellwether article. You did read that, didn’t you?

You might want to, because I’m often right. Just saying.

Now that the first bell has rang and we’re off to the races, so to speak, I wanted to follow up with you, my subscribers, and answer your most pressing questions. I’ve rounded up what you asked, and now I’m answering below.

So first up…

Q. What if big firms join SoftBank? I’m talking about Citadel, Goldman, etc. -Ekram

As far as big firms joining SoftBank to move markets or on any “trade,” that’s not how Wall Street usually works. To the contrary, the big players compete against each other, try and figure out what everyone’s doing and look for ways to profit off them.

In Citadel’s case, it was probably on the other side of SoftBank’s trades, having sold them the calls and had to hedge themselves by buying stock. The big players only work together if their survival is threatened, otherwise they’d stab each other in the back before they’d partner with them.

Speaking of Citadel, something strange happened last Monday before the Thursday meltdown. Did you notice that most of the brokerages had problems, meaning Fidelity, Schwab, TD Ameritrade, Robinhood, etc., all “went down,” as in their platforms were down? They each gave a different answer why, and none of them made sense, that’s because they all lied. They couldn’t tell their customers what really happened, why they were all down because it would freak us all out. But not me. Because I think I know what happened.

I think Citadel had a problem and since they all sell order flow to Citadel, something happened there. We’ll never know (but I’m trying to figure it out) because the truth would frighten investors if they knew how fragile the mechanics of the markets really are. Stay tuned.

Q. So now we have some really, really big boys gunning for SoftBank. How might they do this and can we position us small guys to take advantage? Or like mice around two fighting elephants, can (and should) we find a huge rock to hide under? -Peter

I’m guessing most of the unwinding of the hedges is done, which means that overhead selling is mostly out of the way. Which means SoftBank’s probably on the sidelines or setting up another play.

The good news is you can position yourself to take advantage of what the big players do, you just have to jump in on the same side of what they’re doing. I’m guessing here, but it’s a possibility…if I’m at SoftBank and smiling at the $4 billion I just made pushing markets up because I pushed up the stockswe all know move the market, I’d look to do it again, only this time I’d go the other way. I’d have seen how we sold off, that markets are still jittery and prone to selling…SO, I’d buy puts on a lot of the highflier stocks and then start shorting all of them, especially the mega-cap tech stocks that drove the market up, I’d step all over them.

WHY? Because if I’m SoftBank I can. The play this time is to profit on my puts by knocking the market down. If you think that’s a good set-up, and believe me it is, then buy some puts yourself. Because if SoftBank isn’t going to try that, someone else will.

Q. Back when the S&P500 had risen about 20% from its low, every single financial newsletter guy that I have been religiously reading for many years – including yourself – was absolutely certain that there would be another pullback, and for that reason were recommending SH as a sure thing. And then, the markets bounced.

It’s easy for me to understand that this total V-shaped recovery took nearly everyone by surprise. I just don’t know what good options I might want to consider at this point… Clearly I don’t want to start placing all sorts of other trades, in order to try to make up for my [as yet unrealized] losses, right? -Ken

You’re right Ken, I got it wrong, I didn’t think the bounce was sustainable and early on thought we’d retest the lows. What I missed, because I didn’t see it coming, was the entry of so many retail buyers, so many long speculators. I honestly had no idea they were driving stocks higher. When I realized what had happened it was too late and I switched gears and turned bullish.

Now, I believe we’re about to see whether those retail buyers are still willing to buy stocks as we shake loose from the highs and start seeing stocks and indexes roll over. If we’re going to get a correction that could turn into a rout, what we’re seeing right now is the start of it. Sure, we can turn up again. But, I feel the market’s tired and investors are worried they’ve driven stocks to levels that unsustainable, and they’re ready to take profits.

It’s started, whether it will play out fully, meaning we see retail sell and even start shorting, and ETFs selling underlying holdings, is a distinct possibility. You’ve hung in waiting for this, stay with you positions and see if this is the break that could have happened but didn’t because of retail buying. They can sell and my guess is they will. We’ll see.

Q. MGK – all six are in its top 10 holdings. Do you have targets and supports for for MGK? Also, NVDA is highly sensitive to the overall market. What levels would make you nervous there? -Stuart

MGK has support rate $180, and we’re there as I write this. We’re right at its 50-day moving average. Be careful, if we break below that your next support is $160-$165. Below that it’s scary.

NVDA has support at $469, then $431, then $392.

I’m seeing a lot of stocks rollover, indexes too. Make sure you have your stops in place, you can always get back in when the coast is clear.

Until then,

Shah