Beware the Tesla Inc Stock Death Cross

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TSLA stock - Beware the Tesla Inc Stock Death Cross

Source: Tesla

Regular readers know that I am long-term bullish on Tesla Inc (NASDAQ:TSLA). I like the fact that TSLA stock is leading the charge in alternative energy space, not only with its electric vehicles, but also with its solar panels and home storage batteries.

Tesla is an early mover in the alternative energy space, and it’s future is bright.

That said, TSLA stock is overvalued and has been for some time. The shares tend to ride lofty peaks and deep valleys based on the ebb and flow of investor sentiment, which is heavily fueled by the financial media and Tesla’s own CEO, Elon Musk. Musk is incredibly charismatic — a la Steve Jobs — and he has a habit of over promising when it comes to Tesla’s products … one look at Model 3 deliveries is all you need to know there.

Valuation concerns came to a head in the final quarter of 2017, and TSLA stock has fallen more than 22% since its September peak near $380. The shares eventually found support near $300, and TSLA spent all of November bouncing between $300 and mounting resistance near $320.

TSLA Stock
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Looking at the chart, you can see that the TSLA stock price could be on the verge of taking another massive hit. The stock’s 50-day and 200-day moving averages are closing in on a bearish cross, one known among technical analysts as a “death cross.”

While some analysts believe that such a technical formation is just a result of a stock’s intermediate-term price action and can be largely ignored, others believe it is a sign of additional selling pressure that will send the stock sinking even further.

The problem is that TSLA stock is vulnerable right now. Tesla and a plethora of other alternative energy companies depend on certain U.S. tax breaks and incentives — and the Republican tax plan winding its way through Capitol Hill guts many of those breaks and incentives. While the bill isn’t likely to completely scuttle Tesla’s plans, it is sure to slow things down and eat into Tesla’s already tenuous bottom line.

With TSLA stock already trading in bear market territory below its 200-day moving average, the last thing the shares need is a “death cross” to further influence investor sentiment — especially since this overvalued stock thrives on positive sentiment.

Speaking of sentiment, there is a wealth of negativity flowing toward TSLA stock. For instance, Thomson/First Call reports that 15 of the 23 analysts following Tesla rate the shares a “hold” or worse, with an average consensus price target of $310.91 — a discount to Tesla’s current trading range.

Furthermore, short interest currently accounts for about 25% of TSLA stock’s total float after rising 7% during the most recent reporting period.

Lastly, TSLA options traders are also firmly on the bears’ side. Currently, the Jan 2018 put/call open interest ratio rests at 1.52, with puts easily outnumbering calls among back-month options.

What’s more, there is potential for a sizeable move heading into January 2018 expiration. January 2018 implieds are pricing in a move of about 9.5% for TSLA ahead of expiration.

This places the upper bound at $350 and the lower bound at $290. A rally to $350 seems unlikely barring a major development for Model 3 shipments. A break below $300 seems more likely, given the technical and sentiment backdrops, and it could result in a longer-term downtrend for TSLA stock.

Two Trades for TSLA Stock

Put Spread: With price action, technicals and sentiment all lined up against TSLA stock right now, it’s hard to bet bullish on the shares. But the problem with a bearish bet is that any positive presentation from Elon Musk could push the Tesla-ites back into bull mode.

That said, I’m still going with a bear put spread heading into January 2018. Traders looking to benefit from a renewed downtrend for TSLA might want to consider a Jan 2018 $305/$310 bear put spread.

This spread was last offered at $2.11, or $211 per pair of contracts. Breakeven lies at $307.89, while a maximum profit of $2.89, or $289-per-pair of contracts — a potential 36% return — is possible if Tesla stock closes at or below $305 when January 2018 options expire.

Put Sell: If you’re looking for a more neutral play, or if you are looking to pick up TSLA stock at a bargain price, then a Jan $290 put sell position could work in your favor. If you’re looking for a more secure put sell, i.e., not owning the shares, drop that strike to about $250 (last bid at $1.25, or $125 per contract) to make sure you don’t own the shares.

At last check, the $290 put was bid at $5.93, or $593 per contract. In this trade, you keep the premium as long as TSLA stock closes above $290 when January 2018 options expire. If TSLA trades below $290 prior to expiration, you could be assigned 100 shares for each put sold at a cost of $290-per-share, which would be a nice price in which to enter a long TSLA position.

As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, https://investorplace.com/2017/12/beware-tesla-inc-stock-death-cross/.

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