Tesla, Inc. (TSLA) shares rose an astounding 21% on Tuesday morning before settling for a "modest" 13% gain. Most folks know by now that Elon Musk's brainchild has entered a parabolic uptrend in recent weeks, with shares lifting an astonishing 139% since the first trading day of 2020. The stock has posted even stronger returns when looking at a longer time frame, gaining nearly 250% since reporting third quarter earnings in late October.

It is perfectly natural for sidelined investors to feel envy and regret for not taking the plunge and buying the stock, especially after it broke out above two-year resistance near $380 in the second half of December. But now is no time to lose perspective because the vertical impulse has all the signs of a climactic blow-off event that will soon print a high marking the rally's end for several years, at a minimum.

Classic Feedback Loop

The stock is engaged in a classic feedback loop, in which the momentum crowd buys high to sell higher while weak-handed short sellers jump into positions, hoping to catch the elusive "top." In fact, Tesla stock is the most-shorted stock in the market right now, highlighting a huge supply of armchair technicians who decided that they understand the fine art of short selling. Nothing could be further from the truth because predatory algorithms "sense" when this rocket fuel enters the market and takes appropriate steps, generating massive overnight moves in this case, to shake out weak hands.

Younger folks entering the stock market after the 2008 crash haven't experienced many Tesla-like parabolic scenarios in the past 12 years, so this event has likely caught them off guard. It is a different story for those of us around in 1998 and 1999 when the internet and lax Fed policy combined to trigger one of the biggest bubbles in market history. Hundreds of tech stocks took off in parabolic uptrends at that time, posting 100-point overnight gains that attracted a legion of day and swing traders seeking to profit.

When Bubbles Break

What happened next is the stuff of market legend, with the March 2000 top giving way to a burst bubble that dumped the entire tech universe 70%, 80%, or even 90% in less than three years. It took a decade for those stocks to recover and even longer to post new highs, highlighting the extreme risk faced by market players who allow regret to overcome common sense right now and buy long-term Tesla positions.

This greed-induced impulse presents a side to this phenomenon that few folks are willing to talk about right now. When this buying spree finally ends, and it will end, many shareholders who have booked incredible profits in recent weeks won't recognize the reversal, expecting a simple pullback rather than a steep descent. They'll continue to hold the stock while their profits vanish, with many finally capitulating when their profit and loss statements turns red.

Reversal Draws Near

Chart showing the share price performance of Tesla, Inc. (TSLA)
TradingView.com

So when will this ridiculous rally finally end? Technically speaking, the impulse is already approaching the 4.00 Fibonacci extension of the two-year trading range, but that isn't predictive in a vacuum. Perhaps more importantly, the monthly stochastics oscillator is just now reaching an extremely overbought level that signaled reversals in 2013 and 2017. So, while the end may be getting close, the rally could easily top $1,000 before a massive retracement sets into motion.

Smart traders will be looking for volume to climax with price at the top. Volume posted four times the 60-day moving average on Tuesday while the price bar carved a spinning top candlestick. This probably isn't sufficient to call an end to the rally because, historically speaking, climax events can post up to 10 times average volume before flaming out. In addition, the $1,000 level is now in sight, with round number magnetism likely to attract price in coming sessions.

The Bottom Line

The majority of long and short sale positions are likely to lose money on Tesla stock due to the unique dynamics of parabolic impulses.

Disclosure: The author held no positions in the aforementioned securities at the time of publication.