Tesla Motors (TSLA), the designer and manufacturer of high-performance electric vehicles, has stood on center stage for the momentum and trend-following investor crowds since at least May, when the stock began a vertical incline. Ever since then, those looking to short the stock had to do so on an intraday basis, or risk staring at losses of 5% right at the open of the very next day.
The trend-following game works like a charm until it doesn’t, though, which is to say that the players in this space particularly act as a herd, and those too late to note the departure of the herd are usually left holding the bag.
Thus, when looking at a chart such as the one currently on display at Tesla Motors, what gives me the shivers is simply the slope of the line. Regardless of whether the company will end up selling a car to every citizen of driving age, slopes this steep — i.e., vertical — tend to mean-revert in violent fashion.
To wit, the stock rallied close to 180% from early May up to its recent post-earnings highs on Aug. 8. That’s 180% in three months of trading; gravity will begin to weigh on this stock one day.
The issue with trend-follower stocks such as TSLA is that a defined top first must be in place for the bears to get their days, and once the bears have the ball, they dare not blink or risk giving the game right back to the bulls.
To be sure, there have been signs that the amazing bull run in Tesla stock will come to a rest for some time. On the below chart, note that both the RSI and Stochastic momentum oscillators have diverged from price and created lower highs as the stock pushed higher.
So what would a first attempt at mean-reversion lower look like? A pullback of Tesla to its 50-day simple moving average (yellow line) would coincide with a simple uptrend line dating back to May (currently around $115-$120) and thus offer a healthy first mean-reversion leg.
Serge Berger is the head trader and investment strategist for The Steady Trader. Sign up for his free Weekly Market Outlook Video here. As of this writing, he did not hold a position in any of the aforementioned securities.
