Opportunity: This Stock Has Lower to Go in the Coming Weeks

Shares of electric car maker Tesla Inc (NASDAQ:TSLA) dropped 7.24% on Wednesday on the back of a couple of news headlines that didn’t sit well with investors.

Since my last take on this company on June 19, TSLA stock has now reached my first downside target, yet more downside looks likely through a multiweek lens.

In many ways, the most recent 15% “correction” in TSLA stock is just a classic mean-reversion story, i.e. a stock that rallied too much too quickly and has been called back to earth.

However, each time the topic of Tesla has come up in my conversations with Wall Street to Main Street over the past few months, the level of emotions involved in this stock became ever more palpable to yours truly.

Rarely in my thus-far nearly 20-year career as a trader have I seen a stock so polarized by bulls and bears.

In other words, TSLA stock, by my eye, continues to be either made up by staunch bulls or grizzly bears — nothing in between. This type of emotional makeup of the investor base in a stock will almost always lead to big overshooting rallies and sharp mean-reversion moves lower as the tug of war between bulls and bears can only result in more volatility.

To wit, when I last mused about TSLA stock on June 19 I offered that the stock was reaching historic overbought levels and that it should no longer be chased to the upside. I laid out my bear case for at least a mean-reversion move lower to an initial price target around $340, which was reached on Wednesday.

Two news bits on Wednesday were largely responsible for the sharp drop in the stock: First, car maker Volvo announced that all of its new models as of 2019 will be either hybrids or fully electric cars. This in a good many ways simply means stiffer competition for Tesla. Second, Goldman Sachs reiterated its bearish call on the company and slapped a new $180 price target on the stock.

Whether TSLA stock will fall as low as Goldman’s $180 target I am not smart enough to know (no one is). But what I do know is that TSLA stock is now more than ever a tale of two time frames.

On the multiyear weekly chart, note that the big breakout rally from this past March, which pushed the stock clearly out of its multiyear consolidation phase in this time frame, has yet to retest this breakout line around the high $200s. Through the lens of investor emotions the stock simply became too crowded as is evidenced by the vertical blow-off rally of the past couple of months and now is in mean-reversion mode.

Keeping perspective on TSLA stock is now crucial for investors and traders in any time frames. From November 2016 into the June highs the stock rallied about 110%. A 50% retracement of such a rally is anything but unusual and in the case of TSLA stock would get it back to the $280 area, where longer-term investors may find a better spot to buy the stock again … upon a strong bullish reversal confirmation.

On the daily chart, we see that thus far, Tesla’s tumble over the past week and a half has merely mean-reverted it back to the lower end of its up-trending channel and momentum oscillators such as the MACD at the bottom of the chart through a multi-week lens are nowhere near oversold.

Because this is TSLA stock, it can at any point bounce a quick 5% or more on any tweets from Elon Musk or cute upgrades from investment houses. In my eye however the stock has lower to go in coming weeks toward the high $200s, which is to say that quicker traders may still find opportunity to play the stock from the short side using the stock itself or option put spreads, or even by selling out of the money call option spreads.

So you know, Tesla’s next earnings report is scheduled for August 2, which from a data perspective is the next real toggle date for the stock.

— Serge Berger

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Source: Investor Place



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