January 5, 2015
As explained in our “2015 Resolutions in Focus“, we’re going to begin providing longer-term investment theses. The first that we’re going to take a look at is $TSLA. While the fundamentals of the company remain strong, the plunge in oil prices may have a significant negative impact on the company in the longer term.
A Break in the Uptrend
After spending nearly three years in the $30-$40 range, TSLA shares powered higher to nearly $300 in just two years. During that enormous run, the shares formed a bullish uptrend with a series of higher highs and higher lows. That’s exactly what you want to see during a rally. It creates a number of strong support levels for the stock.
However, during that rally, the MACD and RSI both formed significant and long-term negative divergence. While shares continued to hit higher highs, these two indicators continued to decline and form lower highs. Along with these longer-term warning signs, a number of other very bearish indications emerged in just the past four weeks.
- A Break in the Uptrend. In the last week of November, TSLA broke below the very well-defined support line that formed over two years. Last week, the shares re-tested that level and were clearly rejected.
- Lower Low. Shares created a lower low for the first time. The previous low came in at the $220 level, while TSLA dropped below the $200 level during December.
- Moving Average. the 40 week moving average has historically proven to be a strong support level. That MA is now acting as resistance for shares, which failed last week on a re-test of that level.
- Negative Divergence. The MACD and RSI indicators continue to show significant weakness.
- Head & Shoulders. A massive head and shoulders pattern has emerged in the daily chart (below).
Massive Head and Shoulders
A very well-defined head and shoulders pattern has emerged on the daily chart. The all-time high price for TSLA marks the top of the head; the neckline sits at just about the $220 level, which has also acted as strong support for shares over the past six months.
Why a Confirmed H&S Pattern is Bearish. After breaking below the uptrend support level (rising dotted black line), TSLA shares created a lower high, i.e. the right shoulder. This is what makes a head and shoulders pattern significant. Investors first create a new high (left shoulder), before testing support at the neckline. When that support level holds firm, investors are able to bring shares up to a higher high (head). The neckline support is held again, but investors are not able to bring shares back up to the previous level, forming a lower high in the process. This is a mark of waning demand for shares, which are then able to break below that previous neckline support level.
Neckline Support. As you can see with TSLA, that neckline was broken and investors re-tested the neckline from below. The neckline support isn’t a single price (i.e. $220 exactly), but instead is a range. In this case, it’s the $220-$230 level. The TSLA re-test was actually testing resistance at both the neckline as well as the 50 and 200 day moving averages. Shares failed to re-take all of those levels and have turned back down.
Additionally, there is negative MACD divergence forming on the daily chart. While higher highs in price were created, the MACD continues to create lower highs. There has been some unknown selling pressure in shares for some time.
CONCLUSION. We’re taking a bearish position in $TSLA via shorts and longer-term options. We need to give the pattern time to prove itself and don’t want to be caught in anything shorter-term. The H&S breakdown target is $150, but we’re watching the stronger support level of $140. A break back above the 50/200 DMA’s (roughly $230) would negate our thesis, which is the level at which we would exit our position.