NEW YORK (TheStreet) -- As an active trader, I enjoy watching volatile stocks and Tesla (TSLA) tops the list lately. I've written about Tesla recently, and you can read the two most recent articles here and here.
Make no mistake about it, though, the articles aren't about trading. Traders watch charts to make decisions; fundamental information, including P/E ratios and profitability, play little or no role. If you're an investor with a buy-and-hold strategy, I'm talking to you because you're the type of investor who does care about profitability and return on investment.
The distinction between the two is notable, because Tesla's moves up or down during the few days after publication doesn't mean I'm right or wrong. Besides, I'm not in the predicting-the-future business; I'll leave that to the fortune tellers. I am in the probability-predicting business, and I don't use star alignment and palm reading for that.
To predict the chances of a price movement, I use historical events that share similar characteristics. As Mark Twain articulated, "History doesn't repeat itself, but it does rhyme." Based on that observation, Twain could have fared well trading stocks. Why technical analysis works well for those who take the time to understand it is because it often measures crowd behavior.
There is nothing magical about lines and circles on a stock chart until you take it to the next level and use the information to gauge market sentiment and emotion in relation to other information, such as short interest and forward earnings estimates. Few, if any bought Tesla stock because of its earnings report. Operationally, the company once again lost money, and that's with a massive $7,500 effective price-tag reduction, courtesy of the tax payer. It wasn't enough, and it's not likely to be enough in 2013 to raise the automaker into the land of profitability from selling its product. Yes, people were buying shares like crazy after the earnings report. That's called a short squeeze, and it's not going to last for long. The short squeeze started because too many writers were tripping over themselves to report that Tesla made a profit. Unfortunately for many readers, the alleged stock gurus trumpeting Tesla's illustrious story were either too lazy to read, didn't understand what they read, or didn't care what the earnings report and future guidance stated.
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