TSLA Stock: Bearish Implications
Tesla Motors Inc (NASDAQ:TSLA) makes headlines almost on a daily basis. The news is centered around Elon Musk’s endeavors from electric cars to battery production, and even space travel. As a result, Tesla stock has developed a cult following.
I have heard many sides of the argument why people like TSLA stock, but very few have had the courage to stick their necks out and pursue a bearish argument against owning Tesla stock.
My analytical arguments are always based on technical analysis, and this means I base all my investment conclusions on the price chart of the stock I am looking at. I have been watching TSLA stock for some time now, and the signal I managed to generate from the charts turned bearish in late 2014 and that signal has remained bearish. The price action this week also reaffirms the bearish premise.
I am having a difficult time wondering where all the bullish enthusiasm for Tesla stock is coming from, because I am failing to find any.
The following chart illustrates the indicator that gave a bearish signal in 2014.
Chart courtesy of StockCharts.com
On the Tesla stock chart above, you will notice the lower panel label “MACD.” Moving average convergence divergence (MACD) is a simple and effective trend-following momentum indicator. Signal line crossings are used to distinguish between bullish and bearish signals.
In December 2014, TSLA stock generated a “sell” signal when the monthly MACD signal crossed in a bearish manner. This signal effectively halted any sustained gains in the price of Tesla stock, and a sideways trading range developed as a result.
The sideways trading range has a defined level of support and resistance, and it can easily be seen on the monthly chart above. TSLA stock has been unable to close above $270.00 by month-end, and it has been unable to close below $185.00 by that same month-end. The price has managed to break these levels on an intra-month basis, but these levels continue to contain prices on a month-end basis.
A close above or below these respective levels by month-end would constitute a breakout. A new trend is expected to develop in the direction of the break.
The following chart illustrates how positive news has failed to translate into positive pricing action.
Chart courtesy of StockCharts.com
On October 3, 2016, TSLA stock spiked higher on news that deliveries and production numbers exceeded earlier guidance. This bullish news caused Tesla stock to run straight into overhead resistance that managed to stop any further progress.
The overheard resistance is marked by the 50-day and 200-day moving averages. These indicators are used by trend traders in order to discern trends. When TSLA stock is trading above them, it is bullish and when TSLA stock is trading trading below them, it is bearish. The inability for TSLA stock to break above these moving averages can only be interpreted as a bearish indicator.
While TSLA stock was testing these moving averages from beneath, these moving averages crossed, generating a death cross. A death cross is a bearish signal that is produced when a 50-day moving average, highlighted in blue, crosses above a 200-day moving average, highlighted in red. This is not an indicator to brush aside, as it signals that a bear market is on the horizon and many selloffs have begun shortly after such a signal.
On October 6, 2016, Tesla stock opened lower, creating a gap on the price chart. The price action was effective in creating an island top. An island top is a reversal pattern that consists of two gaps; a gap up and gap down that occur at the same price level. An island is created as the price action between the gaps is isolated.
The pattern is bearish because all of the longs who initiated positions after the initial gap down are trapped. Or, as the pattern suggests, they are trapped and isolated on an island. These long positions in Tesla stock are now facing losses, and liquidation of these longs will only serve to fuel the bearish trend.
The Bottom Line on Tesla Stock
I am bearish on TSLA stock and I believe that support at $185.00 will once again be tested. A break below this level on a monthly basis will have ominous implications. My bias on Tesla stock will remain bearish for as long as the price chart supports this view.