Electric car maker Tesla Motors (TSLA) reported its much-awaited third-quarter earnings results after the close Tuesday. Tesla earnings came to 12 cents per share, beating analyst estimates by a penny. Still, those EPS were higher by about 113% year-over-year, which in a way (in hindsight, at least) justifies the 12-month surge in Tesla stock — from a fundamental point of view.
TSLA forecasts it will sell 21,500 of its flagship Model S cars in 2013, but that was light of some loftier forecasts by analysts. Additionally, the company’s expansion into Europe and Asia is underway and somewhat clouding the forecasts for total sales going forward, at least temporarily.
Either way, after it was all set and done, Tesla stock dropped 14.5% in Wednesday trading, its biggest one-day drop since January 2012. As it so often happens with cult stocks, as a result of analysts trying to trump each other to gain attention, expectations for sales and earnings rose too high, and Tesla stock eventually was going to correct sharply.
Which it did.
Looking at the multiyear chart of TSLA, its year-to-date rise still stands above 350% despite Wednesday’s selloff. At its early October highs, however, the stock was higher close to 500% on the year.
While those are astounding numbers to look at, they tell us little to nothing about what to do with Tesla stock from here.
The core of my assessment of TSLA continues to be its steep slope, and the fact that slopes this steep ultimately set into often violent mean-reversion moves lower. Also because of the steepness of the slope, there are many trendlines we can draw and point to about support either holding or snapping. The one I find most compelling is the uptrending channel that Tesla stock traded in from roughly May until October of this year, which given Wednesday’s selloff is now well broken.
So where could Tesla stock find support?
A first support area around $150 has now been reached, which is a confluence support area made up of the TSLA’s 100-day simple moving average (blue) and a 25% retracement of the entire 2013 rally. Next support is around the $130 mark, followed by $115, which offers some horizontal support as well as the 50% retracement of the 2013 rally.
Rather than trying to catch a falling knife at this stage, for most investors it will pay to wait for TSLA shares to settle into a better bottoming formation, from which point the long side will again set up with better odds.
For quicker traders considering both the long and the short side of Tesla stock, should Wednesday’s low eventually give way to lower lows, then the aforementioned support levels could be targeted with defined risk.
Learn more about the strategies Serge Berger uses to create profits in the market every day. Download his trading plan in the “Essence of Swing Trading” eBook by clicking here. At the time of publication, Berger had no positions in the securities mentioned.