Ever since the late-March breakdown, Tesla Inc (NASDAQ:TSLA) has been in “Pothole Hell.”
Pothole Hell is the place car stocks go when buyers lose control. This week’s action has me thinking more pain is in the offing. Let’s explore the bearish turnabout and identify how to best capitalize on further weakness in TSLA stock.
The significance of the recent support breach can’t be overstated. As shown below the $300 price zone was a significant floor for many moons. Once it finally faltered, prices crashed, technical red flags flew and TSLA hasn’t been able to find its mojo since.
It’s not exactly coincidence that $300 was the ceiling that ultimately felled the snap-back rally. Old support becoming new resistance isn’t just an interesting adage. It’s usually the truth.
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Until bulls remount $300, the path of least resistance for Elon Musk’s flagship is lower.
Drilling down to the daily chart reveals a few more reasons why sellers hold the upper hand. Tesla is now submerged beneath the falling 200-day, 50-day, and 20-day moving averages.
And they’re all pointing south. In a “sell-the-rallies” environment such as this, it’s going to take quite the spark to turn sentiment. What interests me today is the steady chipping away at support near $275.
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Its eventual failure could lead to a swift descent back to the $245 pivot that finally halted the late-March breakdown.
Sell Tesla Bear Calls
If you’re willing to wager TSLA remains below $320 for the next six weeks, then sell the July $320/$325 bear call spread for 82 cents.
The potential profit is the initial credit which will be captured if the calls expire as worthless. The initial cost is $4.18. To lose it would require Tesla to race above $325.
I suggest bailing if the stock rises above $320 to minimize the damage. Your probability of success stands at 80% based on current option pricing.
As of this writing, Tyler Craig held bearish options positions in TSLA. Want more education on how to trade? Check out his trading blog, Tales of a Technician.
