QuantumScape (QS) trade analysis

I have become somewhat frustrated with Blogger and am thinking of moving my blog with over 500 posts over to WordPress. While the old blog remains, I will leave a note that my new entries will likely end up here on WordPress (which is not ideal as my creative writing entries are mixed in with my trading journal: sorry about the mess and please pay attention to the tags!)

After an oversized run of 140% in 11 days, I wanted to analyse and record why a trade in QS went well (this is not trading, investment or any other advice as I have no relevant industry qualifications). Instead, I wish to record, as part of my trading journal, the key points that went into the trade and what I was considering at the time.

1. Fundamentals were very attractive: Unlike TSLA, the technical fundamentals are world class and transformative. Rather than hype and marketing spin (“gigafactory,” “autopilot,” “supercharger”) that in reality is ranked at the bottom of the industry (such as in autonomous driving or build quality), QuantumScape had leading experts vouching for their technological advancements and world leading partners investing in the company and outcome. Their management communication was transparent and verifiable, unlike the misleading market moving tweets from TSLA so that built a level of trust missing from TSLA. Background, partnership and investors are particularly important in light of NKLA and TSLA. Only TM is said to have comparable solid state battery technology but the details of their technology have not been disclosed even though production is said to be planned for 2021, much earlier than for QS. Given that it has been a 40 year old problem, it would be odd that two companies reached breakthroughs at roughly the same time. Still, the potential to dominate this market makes QS very interesting.
2. Catalyst to action: Although there was mention of QS and the reverse merger months before, it was only after a battery technology presentation that QS became truly interesting. The fundamentals are important and potentially industry changing but having verification of their claims provided a strong positive catalyst that was the compelling reason to act on the trade, despite a 17% gain earlier in the day as I felt there was much more runway left until 2024.
3. Ideal market structure entry point: Most important was the realisation that the trade entry was at the lower parallel, so an ideal entry point despite the 17% gain on the news. Before, I sometimes failed to act on a trade because I thought I was too late only to see it move many times more: being able to separate noise from signal is one of the more difficult aspects of trading because decisions are always made under conditions of uncertainty. What is worse is that even when you are correct you can still be destroyed so that investing in being right becomes highly destructive if you are not being paid for your exposure (e.g., TSLA). Attaining that fine balance between caution and confidence requires great skill and work and can be easily lost by a confidence shattering outcome like TSLA.
4. Second guessing the trade: Although there was a drop after the initial excitement to $87 on the back of an analyst price target of $24, I held on because subsequent drops suggested a 2:1 ratio of gain to pullback and price should hold near $60 as the lower parallel. It did, which only increased confidence in the price action. Had it breached the lower parallel I would have had to cut exposure despite the trade only having been four days old. I had to step back and look at the price action from a longer term point of view. I cannot underscore enough how important it was to get this decision right. When disaster strikes one can easily cut all positions the instant they move against you which can prove counter productive as they can reverse and run away from you and cause even more frustration and loss of confidence. With a breakthrough product that would not be in production until 2024, current price action had to be purely momentum driven. The 2:1 rise:drop ratio suggested bigger funds buying and selling as well to me. Most of the work in the trade was consumed in re-thinking the trade and resolving to stay in the trade despite the 2:1 drop. Subsequent quiet trading action held the lower parallel and was encouraging, suggesting sustained buying despite the analyst price target of $24 which caused the selloff from $87, no doubt. But as TSLA analyst price targets have demonstrated, the analyst community has been worse than useless. As more time passed and the lower parallel held, I was more confident in the trade and in fading the analyst comment.
5. Confirmation with market structure: QS breached the median line with ease and approached the upper parallel very quickly. As this market is in a bubble, I was prepared to stay with the discipline of reducing most of my exposure at the upper parallel, with only a probing exposure left to monitor the stock. Although valuation concerns at this point were rampant, the main concern was that price had already hit the upper parallel. It was not looking like it could breach it, so stops were put in close to capture as much of the move as possible. Learning to exit a trade correctly is even more difficult than learning to enter correctly, with great potential for destructive second guessing and blowing out of risk controls.
6. Decisive exit at the ideal exit point with probe remaining: As stops were hit, a probing position was left to monitor price action. Holding the median line would mean a price still over $100, which admittedly is wildly overpriced, but that seems to be par for the course and this market. Clearly QS is not as attractive now as when it was at the lower parallel, but it remains interesting for watching over time. Any sharp drops would encourage an even smaller probe until it does not matter either way. My earlier smaller trade with NKLA showed me that in a bubble these names could accrue gains that normally take months in days. Having closed out at $70, I was going to stick with my discipline. In hindsight it was the correct call as NKLA is currently at $16, which points to the extreme range to be expected in stocks with no current revenue but a compelling story.

Given my annoyance with TSLA, it is a relief to have one really nice trade again, like in the pre-TSLA days when I was trading correctly and consistently for a long time. No one can predict a priori that a stock will move 140% in 11 days but if you focus on trading correctly, with correct entry and exit triggers, over time you should do well (assuming you don’t meet too many once in 1,000 year insane cases like TSLA). Still, such a large move is yet another indicator of the bubble equities are in at present, a clear warning sign.