Investopedia/Alan Farley: Is Tesla Topping Out?

Is Tesla Topping Out? (TSLA) By Alan Farley | May 23, 2017 — 10:40 AM EDT
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Tesla, Inc. (TSLA) finally rewarded long-suffering shareholders in early April, breaking out above multi-year resistance, but the stock has just run in place since that time despite an endless uptick in technology stocks. While Wall Street and investor optimism continue to run high, bearish divergences are starting to grow due to the lack of short-term momentum and buying interest.

Breakouts tend to occur in three distinct phases. First, a financial instrument pushes above easily-observed price levels that have triggered prior reversals. Second, it reverses and drops into a test at new support, either through a quick pullback or an extended trading range. Third, it confirms the breakout with a series of new high or breaks support in a failure swing that traps trend followers who took exposure during the second phase.

The innovative automaker and solar provider has been engaged in the second phase since topping out at $327.66 earlier this month. Selling pressure has increased since that time while weekly Stochastics has rolled into a sell cycle that should last four to six weeks at a minimum. Taken together, quick breakout confirmation has become less likely while lower prices have become more likely.

TSLA Weekly Chart (2012–2017)

TSLA

The stock went vertical in 2013, carving a broad advance that topped out near $300 in September 2014. Support at $200 denied short sellers in the first half of 2015, ahead of a strong bounce that triggered a second major reversal. Support broke into 2016, yielding a climactic decline that cut through $150, followed by a rally that stalled about 20-points below resistance in April 2016. It pulled back into November, posted a higher low near $180, and took off in a breakout run.

The weekly chart identifies two breakout levels rather than the single interface at $300 (red line) that every Tesla bull can point out to friends and family. The consolidation pattern that started after the stock penetrated the upper level in April marks a changing of the guard, with new money entering while old money departs. In turn, this gives short sellers a final opportunity to break round number support and set off larger scale sell signals.

Unfortunately for current shareholders, the stock can sell off violently through $300 and still maintain positive technicals due to the initial breakout above the trendline of lower highs. That establishes magnetism around $250 that may be stronger than the buying power needed to post new highs at this time. It would also give predatory algorithms an opportunity to shake out weak hands while lowering the current euphoria wave.

Other technical elements also raise odds for that timely shakeout. First, weekly Stochastics has turned lower in a sell cycle that suggests bulls are losing the battle within the congestion pattern between $290 and $327. Second, On Balance Volume (OBV) peaked on May 1 and entered a minor distribution wave that’s failed to attract a significant defense. Third, the longer-term OBV is still flashing bearish divergences, stuck under the 2014 peak.

While shareholders would get hurt by a 50 to 80 point decline, it should also offer a major buying opportunity for sidelined market players because the first pullback to a major support level usually sets off a reliable buy signal. In addition, the 50-week EMA has now lifted into that inflection point, which also marks a nearly perfect 50% retracement of the buy swing that started in November 2016.
The Bottom Line

Tesla shareholders hope the current trading range will eject into a healthy advance that confirms the April breakout above $300. However, the rising highs trendline near $250 could carry greater weight in the long-term technical outlook, with a decline into that support level shaking out a large supply of weak handed trend followers.

<Disclosure: the author held no positions in aforementioned stocks at the time of publication.>