It’s okay to hope for the best in the stock market. But when it comes to Tesla (NASDAQ:TSLA), continued earnings disappointments, a chart that has run out of gas and more challenging macro-environment stress are all taking a toll, forging a well-developed shorting opportunity in TSLA stock.
These days there’s no need for bearish exaggeration like TSLA stock’s “wheels are falling off” swipe from hedge fund David Einhorn’s Greenlight Capital earlier this year. Shares are already off 30% in 2019. That compares to the S&P 500’s gain of 14% despite this past week’s near 6% trade war driven U-turn from all-time-highs.
And Tesla’s recent earnings report did little to quell fears. The report did show TSLA stock is generating free cash flow. That’s good news, as the company isn’t about to run out of cash. But that’s as good as it gets for the bull case.
Sales cannibalization from its lower-priced Model 3, global competition running the gamut from upstart Nio (NYSE:NIO) and established names such as General Motors (NYSE:GM) and European luxury giants Volvo (OTCMKTS:VLVLY) and BMW (OTCMKTS:BMWYY), have all continued to take a toll on Tesla. And it doesn’t stop there either.
As TSLA stock bulls failed to put up a fight against wider-than-forecast losses, missed sales estimates and lower non-GAAP margins, it’s clear Wall Street is more interested in kicking the tires of Tesla and growing increasingly tired of growth-filled promises not living up to their initial billing. And that’s making TSLA stock look progressively well-suited for shorting.
Tesla Stock Monthly Chart
As alluded to above, the days of forgiveness by bullish TSLA investors are in jeopardy. More specifically, a post-earnings dive of nearly 14% in share price and the provided monthly chart strongly support this argument. Right now there’s also no denying TSLA stock should be on the radar for shorting and profiting from a continuation of these bearish trends.
Over the past two months, a counter-trend rally from Tesla’s June low has culminated in a bearish monthly hangman reversal pattern that formed inside a prior Fibonacci support zone now acting as resistance. The candlestick formation is the latest trend information TSLA stock’s bearish series of lower highs and lower lows isn’t finished. It also provides a nice entry for positioning short within the trend and a definitive technical-based exit if required.
The Trade in TSLA Stock
The recommendation is to short TSLA stock on a move thru the hangman low of $222.22. If shares reaffirm the bearish price trend I’d advise initial and partial profit-taking on a test of the 62% retracement level near $158 a share.
To guard against a change of trend and keep the risk-to-reward profile favorably skewed and losses potentially contained to reasonable-looking levels off and on the TSLA stock chart, I’d suggest $252.22 as a stop-loss. This exit keeps exposure down to 13.50% in a notoriously volatile stock. The risk also compares favorably to the minimum reward target, which would generate a return of about 29%.
Lastly, and without playing shares too tightly on the monthly chart, this stop-loss gives shares some necessary leeway within the topping candlestick before pulling the plug.
Disclosure: Investment accounts under Christopher Tyler’s management do not currently own positions in any securities mentioned in this article. The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional options-based strategies and related musings, follow Chris on Twitter @Options_CAT and StockTwits.