After spending thirty years in and around various financial markets, I think that Tesla (TSLA) stock may be the most interesting traded instrument I have ever seen. The underlying story of a disruptor of American car companies, an industry that was once the most powerful in the world, is fascinating enough, but when you add in the extreme volatility and the passion contained in both the bull and bear cases for the stock, it becomes something unique.
Over the years that I have followed TSLA, I have reached the conclusion that while the big picture is so fundamental to that passion, the fact that it is such a widely traded stock means that technical analysis is of exaggerated importance, and right now that suggests that we are headed to new highs, bringing $400 into view.
Trading is always a battle between buyers and sellers, whether you look at it from day to day or over longer timeframes. The intensity of the daily battle can be seen on the chart for TSLA by the number of long candles, indicating big moves each day. Those intraday swings, however, are contained within two distinct and powerful long-term trends.
At the end of 2016, TSLA started to climb sharply, marked on the chart below by the blue channel, and by the middle of 2017 the stock had more than doubled. Then, once the new high was established in September, a long-term downtrend (yellow channel) began.
From a technical perspective, a retracement after a strong move up such as was seen in TSLA is no surprise, but, as is usually the way with long-term trends, both the initial move and the reversal represent shifts in the fundamental outlook. In the early part of last year, the prospect of the Model 3, an affordable, entry level Tesla, had everybody salivating. The view that Tesla could even overtake at least one of the established major auto manufacturers in term of production were not uncommon back then.
The reversal came as it became clear that mass-production of Model 3s was not as simple as it seemed. There were some delays that prompted downgrades in the stock and the focus shifted from future possibilities to present problems. The most notable of those was cash flow. Continued losses raised the specter of another capital raise so, as the market generally took a more risk-off stance, TSLA lost close to forty percent. Over the last couple of weeks, evidence has emerged that Model 3 production is getting back on track, taking the stock to the top of the channel.
This morning, following yesterday’s 50% increase in delivery expectations from KeyBanc, TSLA has broken out of that channel. You could say that a report from KeyBanc is not that big of a deal, but that would be to ignore the technical impact of the recent move. A stock that is traded as heavily as TSLA tends to show exaggerated responses to breaks of very visible levels as the fast money reacts, so this morning’s move above $340 is extremely significant.
Around a third of Tesla’s total float is held short, and a clean break of an important level like this will squeeze many of those positions out. That could result in a rapid return to the highs and a situation where any good news on the fundamental front causes significant pops.
So, while a case can still be made that Tesla will need cash at some point soon and a capital raise is still a possibility, that is not the point. The prospect of the Fed changing their outlook this week, thus encouraging a return to a full risk-on atmosphere, the reasonable expectation that others will follow KeyBanc’s lead and raise expectations, and, most of all, the break out of the bearish trend all point to a significant pop in the stock that brings $400 into clear sight.