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Technical Tuesday: Tesla Steps on the... um, "Gas"?

By Chris Rowe December 3, 2013 Facebook Logo Twitter Logo Email Logo LinkedIn Logo

Tesla (TSLA) is up 13% today after a Morgan Stanley analyst, Adam Jonas, made positive comments about the stock. 

The battery powered electric automobile maker saw its shares trade up about 550% this year and then tank from $194.50 to the $120 level.  At that level it found support for a couple of weeks and put in an RSI buy signal.  

It started running into trouble when there were reports of the cars catching on fire.  But the real reason it dropped so much was simple.  It's a momentum stock.  It was up sharply this year on a short squeeze -- there was a huge "short position" (where investors first sell the stock hoping to buy it back in the future at a lower price, profiting from the difference).  But once the stock started charging higher, those short sellers were forced to buy back their shares, accelerating the sharp advance. 

Then momentum players jumped in, and so on.  But there's a real story behind this stock's gain.  To oversimplify, instead of focusing on valuation, this is the kind of stock that bumps higher as Tesla opens new energizing stations that allow the cars to travel to more places.

The media will have you believe the stock retraced 50% of its 6 month gain because of reports of a few cars catching fire.  But the fact is that it went too far too fast and needed a reason to retreat.  Retracing 50% of its gain is perfectly normal, and actually to be expected.  The fact that it retraced by 50%, almost on the nose, makes a case for this being a pure technical play.

Recently, the number of shares that are held as short positions (a.k.a. "the short interest") has risen to the highest levels since April (when the stock was at $40, breaking out of its trading range and surging to $194.5 in 6 months).  There are 25.4 million shares short as of the latest exchange data reports.

Reported in The Wall Street Journal:

"Tesla said the German Federal Motor Transport Authority has completed its investigation of fires that started in three of the company’s Model S cars after collisions. The safety agency found no flaws in the car’s design and said it would take no further action. In the U.S, the Model S is still under investigation by the National Highway Traffic Safety Administration, which began its probe last month."

Look at the chart.  There is going to be some overhead resistance with the blue down trend line, the green resistance level at $143, and the red resistance level at $160.  Don't expect the stock to just charge higher.  In fact, it may even make new lows and move closer to $100. 

But having some resistance can be a good thing.  Once it breaks those levels it will prove to the Street that it still wants to go higher.  I would wait until all three of those levels are penetrated before buying the stock. 

It's important to wait until it does make those technical achievements before getting too bullish on it, because just like the precious metals, Silver & Gold, just like Apple Inc., just like 100 other trades I can mention, these things decline sharply from their highs and people make the mistake of jumping the gun and buying too early.  Then they see more downside.  This can happen over and over again until people give up on the thing.  Then it sleeps for a while.  Then it starts a new move higher.  And it often takes much longer than everyone thought. 

Is this going to happen with Tesla?  Who knows.  But it makes sense to buy it only after technical achievements are made.  Buy it after it breaks resistance and buy it again if it breaks its all-time highs on heavy volume. 

I hope this helps your holiday season.  Happy Holidays!