Let’s get this out of the way, Elon Musk is a genius that appears to have a hold on where the future may be going. That said, the outlook for shares in Tesla Motors Inc (TSLA) isn’t as bright as its CEO.
Tesla stock has spent the last six months trailing the S&P 500. Dramatically. Since Oct. 1, TSLA is down more than 15%, and that’s after we saw the stock rally from $140 (more than 40%) over the last month.
While the stock has found some short-term buying interest, the technical and sentiment picture suggests that we’ll see $140 before $250, meaning that there is an opportunity for the traders out there.
After rallying from $140 to $210, Tesla stock is running into some overhead technical congestion that is likely to slow and reverse the stock’s progress.
Keep in mind that the technicals have been incredibly foretelling over the last six months, as traders have all but abandoned fundamental investing.
The $210 is likely to be a sticking point for Tesla with three significant technical hurdles. First, the stock’s 50-day moving average. The stock has spent a brief three days above this key trendline, which is trending lower. Our historical studies show that stocks with declining 50-day moving averages are twice as likely to see daily losses. A break back below this trendline will target the next bearish move as traders sell short-term profits.
Second, the 100-day moving average, which is currently residing right at $210 on the mark. This trendline has been a bearish thorn in the side of TSLA since we saw shares break below it in October. This trend has been very unfriendly over the last six months and the quick snap rally doesn’t look strong enough to override the trend this time around.
Third, Tesla’s Relative Strength Index readings are signalling a short-term sell as the rally extended itself too far too quickly. Similar signals were seen on Dec. 31, 2015 and Sept. 21, 2015, each resulting in short-term selloffs of 35% and 20%, respectively.
While the technical are signaling weakness, the sentiment picture is barely fledgling as investors have yet to commit to a direction, meaning the current trends are likely to stay in place.
Bottom Line on TSLA Stock
Stocks mired in bearish trends are often reversed when there is a swell of investor pessimism. This is the origin of the simple to say, but hard to follow rule: Buy when everyone else is selling. Tesla’s sentiment picture is mixed, adding no bullish or bearish implications to the stock.
Currently, the short interest ratio on Tesla stock is 3.8, indicating that there is a lack of short covering potential. As a matter of fact, the recent short interest ratio activity resembles the movement that we saw in June 2015 when the shorts covered their positions, driving the stock to its highs in July.
The similarities in these patterns may mean that the recent rally in TSLA stock has been the result of a short covering rally, leaving little to no gas in the tank (pun intended).
Given the fact that the shorts have squeezed TSLA to a technically challenging level, our model’s outlook calls for another step lower for TSLA shares, likely revisiting the $140 level before another bullish trade opportunity presents itself.
As of this writing, Johnson Research Group did not hold a position in any of the aforementioned securities.
