It’s that time of year when you comb through hundreds of charts looking for the best ideas for next year. To compile a list of the best technical ideas, I like to look at charts with strong momentum that are breaking out of their long-term base and have risk/reward metrics with well-defined downside risks and potentially strong upside returns. As a result, I exclude another favorite category of mine: playback stocks. These are beaten-down stocks that appear to be bottoming out, breaking long-term downtrends, and have plenty of room for reversal. I wrote about General Mills as a great example of a potential turnaround stock here. After looking at the charts, I almost cringed at the chart that looked the best to me: Tesla. There are no stocks or companies that issue such comments. Everyone has strong opinions, good or bad, about CEO Elon Musk, whether it’s the constant buzz about his reputation or the debate over his salary package. Fundamentally, Tesla stock is not about cars, car sales, or other EVs. Ignore those data points and focus on the future. See how continued growth in robotics and self-driving technology gains momentum and contributes to stock price gains. Then there’s musk. No CEO has done more for investors than Elon Musk. Now that he’s back on the job after the drama in Washington, his focus is on the incentives needed to get paid. Love him or hate him, he’s making his shareholders make money. As a technologist we have no influence on my process, so I can dig deeper and have basic discussions until I’m blue in the face. There are now risk/reward settings on multiple time frames that are too good to ignore. That’s our focus. Let’s examine the stock over multiple time frames to illustrate the importance of recent price movements. The main bullish technical highlights include: A significant breakout to new highs Old resistance acts as new support, providing clear downside risk protection Both key momentum indicators, RSI and MACD, provide buy signals and indicate a move to the upside Let’s now examine the long-term chart, as a breakout on a longer time frame has even more implications for technicians. Here is a 5-year weekly chart of Tesla…the same major technical themes can be seen in the long term as in the short term. This is the bullish confirmation that techies love. We can also see that both momentum indicators are barely approaching the extreme levels experienced when stocks rose to all-time highs after the election. Again, there is a momentum breakout and some level of downside risk at the old resistance level around $420. Let’s go back a little further and look at the 10-year weekly chart. This marks a huge consolidation phase after the historic upswing from 2019 to 2021. This cup and handle formation is one of my favorite patterns. A breakout from this pattern could result in targeted upside to the $600 range. We also know where to limit our downside risk if this pattern fails. So what are the risks and rewards? As a former trader, I know that it is up to the individual making the trade to deal with downside risk. In my work, the $420 level is the level where things can get messy and change my mind on this trade. This represents a downside risk of up to 13%. If the price movement drops to that level, my theory will be in vain and I will try it again. However, the rewards seem to be quite favorable. Our upside objectives far outweigh the downside risks. Given this setup across multiple time frames, an upside target to the $600 area is likely due to strong momentum and rising relative strength. That’s an increase of over 25%. We can debate all the merits of the company and its generous CEO until the cows come home. For engineers looking for a strong bullish case, Tesla’s charts give us a very favorable situation. —Jay Woods, Chase Games CMT Disclosure: Woods’ family owns stock. All opinions expressed by CNBC Pro contributors are solely their own and do not reflect the opinions of CNBC, NBC UNIVERSAL, its parent or affiliate companies, and may have been previously disseminated on television, radio, the Internet, or another medium. The above is subject to our Terms of Use and Privacy Policy. This content is provided for informational purposes only and does not constitute financial, investment, tax, or legal advice or a recommendation to purchase any securities or other financial assets. The content is general in nature and does not reflect your unique personal circumstances. The above may not be appropriate for your particular situation. Before making any financial decisions, you should strongly consider seeking the advice of your own financial or investment advisor. Click here for full disclaimer.
