Tesla Motors Inc: A Must-See for TSLA Stock Bulls and Bears

TSLA Stock
Photo: Sean Gallup / Staff / Getty Images

TSLA Stock: Walking a Tightrope

I have expressed my stance on Tesla Motors Inc (NASDAQ:TSLA) stock in my previous report on the company, and I have outlined that bearish headwinds have developed. and that price weakness could be expected because there was a lack of bullish signals that would support an upward move.

In that report, TSLA stock was trading at $202.24, and now Tesla stock is sitting at $181.47. The bearish headwinds that I identified have continued to swirl and did, in fact, push prices lower. Given the environment that this has occurred in, highlighted by new all-time highs for the equity indices, it demonstrates the relative weakness of Tesla stock and magnifies the strength of these bearish headwinds.

Tesla stock is now sitting at a price that marks an extremely important level of support. TSLA stock is either expected to bounce fiercely off of this level, or see its bottom fall out, with a significant sell-off ensuing. Depending on the time frames I use, both of the scenarios could be argued vehemently.

My views on Tesla stock and the outcome that I project are based on the price action that is occurring on the TSLA stock chart. The use of past data to discern trends and forecast future prices is based on the body of knowledge known as technical analysis (TA). I have been using TA to create investment strategies for over a decade, and TA has served me well. Like anything in life, it is not perfect, but it does wonders in defining my risk and keeping my strategies disciplined.

The following Tesla stock chart illustrates the important level of support that is currently being tested.

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Chart courtesy of StockCharts.com

The TSLA stock chart above illustrates a trading range that has confined the price over the last three years. Tesla stock is currently sitting on support highlighted in green. This level that has supported the price has been breached before, but never on a monthly closing basis. In February 2016, a sell-off gripped Tesla stock but, by month’s end, the stock managed to close above support.

Closing below this level would suggest that the bottom could fall out of Tesla stock. The “bottom following out” is a term used by traders to describe a scenario where no price support exists and, therefore, a tremendous drop might be expected. If the bottom does fall out of Tesla stock, it would also suggest that a long-term top in TSLA stock has formed and that a secular bear market is set to ravage the stock price.

If this is the case, I would hate to even ponder how low the price can drop. I have learned that, when a bear market grips a stock, a price can drop further than fundamentals warrant, and lower than even most pessimists could imagine.

On the chart, you will notice the lower panel labelled “MACD.” The moving average convergence/divergence (MACD) is a simple and effective trend-following momentum indicator. Line crossings are used to distinguish between bullish and bearish signals. In late 2014, a bearish MACD cross was generated, and this signal remains intact. In order for the bulls to regain footing, this signal needs to reverse in short order.

The short-term chart of Tesla stock is quite constructive and, if the price can move above a certain point, it would suggest that the bulls are once again gaining momentum.

The following short-term Tesla stock chart illustrates the constructive pattern that would need to be completed in order to reverse the bearish headwinds.

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Chart courtesy of StockCharts.com

The Tesla stock chart above illustrates that a potential constructive pattern has developed that, if completed, would suggest that bullish tailwinds would once again be swirling around TSLA stock, and perhaps that a test of the previous high is a possibility.

In order for this to happen, Tesla stock would need to close above resistance that is highlighted by the purple trend line marked as a possible consolidation wave. Closing above this level of resistance would suggest that the surge off of the February lows was an impulse wave, and that the price action that followed in April was necessary to unwind the overbought conditions that were created off of that price surge.

A completed consolidation wave would suggest that a new impulse wave is set to develop and, because impulse waves mirror each other, a similar run that took the price from $140.00 to $170.00 could be expected. Such an expectation would push Tesla stock to new highs, but that is only speculation at this point.

Bottom Line on Tesla Stock

TSLA stock is sitting in a precarious situation in which the price can drop swiftly if buying pressure does not appear and support the share price at this level. This scenario is magnified as the trend remains bearish. In order to reverse the bearish headwinds, Tesla stock will need to close above the purple trend line highlighted on the chart above.