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<\/p>\nEverything has a limit, even Tesla. The company\u2019s stocks experienced an explosive growth in the first few days of February 2020, rising as much as 10-20% per day. For a company of their size, this can mean an extra 10-15 million dollars. By February 4th the company\u2019s value exceeded 150 billion dollars.<\/p>\n
The typical stock market jargon used to describe this phenomenon is \u201cpanic buying.\u201d It could also be called \u201cshort covering.\u201d The two phrases aren\u2019t synonymous, but rather two different processes that can happen simultaneously. It\u2019s might be a combination of both that\u2019s causing Tesla\u2019s prices to soar, but at the same time it\u2019s also a sign of of what\u2019s to come.<\/p>\n
Panic buying refers to when investors avoid a stock out of caution, but when its prices suddenly start rising they rush to buy it out of a fear of missing out. The impulsive nature of these purchases means they\u2019re typically bought at market price as soon as the exchanges open. They often do so without examining the order book and whether there are enough sell orders to satisfy the sudden surge in buy orders. Market buy orders are filled at the first available price, so they tend to soak up all sell orders.<\/p>\n
This is where short covering comes into play. Sudden price hikes on stocks with questionable fundamentals like this one are often promising opportunities for short sellers as well. This allows panic buyers to buy their positions not just from previous holders exiting their positions, but also from speculators who are trying to build up a short position. The risk here is that when the number of panic buyers doesn\u2019t decline, prices will continue to rise to the point where short sellers can\u2019t afford it anymore. Once it gets to the point where short sellers need to cut their losses and exit the position, they do so by buying the asset. This is typically done in the form of a stop order that triggerst at a specific price, at which point they turn into market orders. The outcome is that it produces the same overabundance of buy orders that resulted from the panic buyers in the first place.<\/p>\n
At that stage the stock\u2019s prices start to ignore the company\u2019s current or potential performance and become completely divorced from reality. This theory is further backed by S3 Analytics on February 4th. According to the results, it\u2019s possible that short sellers lost up to $2.5 billion dollars during that day\u2019s 20% price hike. Losing such a massive amount of money requires a similarly large number of short traders, enough to affect which direction the market is going.<\/p>\n
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The above chart illustrates how quickly prices escalated while the stock\u2019s liquidity completely dried up. It\u2019s important to note the gaps between the last few candles because the indicate that opening price was significantly higher than the closing price. This means people were trying to be the first in line and get their positions in even before the market opens, This pattern indicates that the stock\u2019s price may be consolidating. If that\u2019s the case, then the concerns surrounding the company might lead to the number of strategic buy positions declining, leaving the traders who didn\u2019t miss out on the first upwards price movements with a tidy profit. Those who got their positions early enough can now sell their shares at a 200% profit knowing that further price growth is not sustainable. As the trend reverses and prices begin declining, short sellers are likely to make an effort to recover their lost capital. Under those conditions, price could plummet back to to the $500 to $600 range, possibly making the current price increase the final stage of the ongoing upward trend.<\/p>\n","protected":false},"excerpt":{"rendered":"
Everything has a limit, even Tesla. The company\u2019s stocks experienced an explosive growth in the first few days of February 2020, rising as much as 10-20% per day. For a company of their size, this can mean an extra 10-15 million dollars. By February 4th the company\u2019s value exceeded 150 billion dollars. The typical stock […]<\/p>\n","protected":false},"author":36,"featured_media":2072,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"nf_dc_page":"","footnotes":""},"categories":[117],"tags":[],"class_list":["post-2069","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-economy-finance"],"yoast_head":"\n