On December 5, Cascend Securities downgraded Tesla Inc (NASDAQ:TSLA), lowering its stance on TSLA stock from “Hold” to an outright “Sell” on the basis of waning demand. It’s the third downgrade the company has been dealt since early October, and arguably the most dire of the three. Cascend has established a TSLA stock price target of $250, which is a whopping 18% lower than the stock’s present price.
And yet, that’s not the most pessimistic outlook for Tesla right now. J.P. Morgan is calling for a pullback to $185 per share sometime next year, as competition from the likes of General Motors Company (NYSE:GM) and now BMW is getting much more serious. In fact, J.P. Morgan was bold enough to peg TSLA as a short-trading idea.
Truth be told, both J.P. Morgan and Cascend Securities have valid concerns, and their downside targets are well-rationalized. I agree, even, that TSLA stock is going to fall quite a bit before it begins to rise again.
That pullback will have nothing to do with the fundamentals J.P. Morgan and Cascend are talking about, however, because this is a stock that doesn’t trade on fundamentals. It’s all about the story, and how the story impacts the stock’s chart in a rather predictable way.
For the record, Cascend’s Chief Investment Strategist Eric Ross explained the downgrade: “The company is burning through cash and will likely need to raise capital in the first half of 2018 (and perhaps even the first quarter 2018.) And there won’t be enough Model 3 production to suggest break-even is around the corner.”
He’s probably not wrong. Then again, there’s never not been a time when Tesla wasn’t burning through cash, and breaking even has never been a particular concern of Tesla CEO Elon Musk.
As for J.P. Morgan’s Ryan Brinkman, last week he explained, “Tesla will face several milestones in 2018 relative to the ramping of production of the Model 3, which we believe will be difficult for the company to meet, particularly if its substantial miss to volume targets in 2017 are to be any guide.”
Again, he’s not wrong. Again, though, he may be wrong about how much the market really cares, and what actually drives TSLA stock higher or lower. This stock is, for all intents and purposes, the centerpiece of a psychological chess match. “The game” is figuring out where the tide turns. Fortunately, the chart of Tesla shares has dropping surprisingly consistent, predictable hints.
Most (if any) investors won’t recall, but way back in May I suggested — contrary to a prevailing opinion at the time — that the breakout from TSLA stock had legs and would either peak around $356 or $398, or somewhere in between. The September peak was just a hair under $390. The stock has since peeled back to its current price of $305.
I don’t bring it up to pat myself on the back (much) though. I’m revisiting that call to validate the idea that when there’s no actual fundamental basis for a stock’s movement, Fibonacci lines provide a surprisingly helpful framework. I also bring up Fibonacci lines again because a new set of them are playing a role in how far the TSLA stock price might slump before finding a firm footing.
Based on the span all the way from the 2012 low of around $25 to the peak of $390 three months ago, two Fibonacci retracement lines come into play. They are a 38.2% retracement of that move at the $250 level, and a 61.8% retracement of that trek, which lies at $164.
One of those numbers should ring a bell — the $250 mark. That’s where Cascend drew its line in the sand. The other one, $164, doesn’t coincide with any particular analyst’s target right now, but I can tell you largely where J.P. Morgan’s Brinkman got his $185 figure. That’s the lower edge of the trading range Tesla shares were stuck in for a couple of years before May’s breakout.
In fact, the $185 level was more or less the support level I used as the target-setting basis back in May.
Don’t misunderstand or read something into my view and review of someone else’s work. I’m not saying J.P. Morgan or Cascend borrowed my context. I’m saying, though most analysts don’t explicitly say so, they’re still looking at the charts of story stocks to try and make logical, fundamental targets for a company that defies logic, and doesn’t actually have any meaningful fundamentals.
I’m also not saying a trip back to $250 or even $185 is an ironclad guarantee. TSLA stock would need to break under a more recent floor around $300 to even worry about such a selloff. (On the flipside, the undertow is bearish, so….)
More than anything, I’m saying until the market actually expects Musk to meet deadlines and expects Tesla to turn a reasonable profit, the chart’s history is the only thing really telling us about its plausible future.
And for the time being, the near-term future doesn’t look all that promising.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can follow him on Twitter, at @jbrumley.