Technical Tuesday: Is Tesla Overbought?
There was one stock everyone buzzed about last week. And when I say "everyone," I don't mean the financial professionals. I don't mean the analysts and I don't mean the money managers.
In fact, of the several hundred people who attended the Investment U Conference in San Diego last week, the only time I saw presenters talking about this stock was when they recalled recommending it when it was 75% cheaper.
But for the attendees, the most buzzed-about stock was Tesla Motors (Nasdaq: TSLA). The big question: Is it too late to get in?
Let's use the simplest form of technical analysis to make our decision: trend lines and volume.
It's important to take a longer-term view first. Let's look at the four-year chart to gain some perspective.
As you can see below, the stock traded in a sideways channel from November 2010 until March 2013. Technical Analysis 101 says "the bigger the base, the bigger the breakout." And when the stock broke out of this 30-month base, you can see a massive amount of volume came into the stock.
This big base breakout justified the huge move higher, whether it was caused by new buyers or bears exiting their positions.
We heard the nonbelieving pundits explain the stock wouldn't hold up because the huge advance was a technical move based on a "short squeeze." So many people were shorting the stock, the naysayers claimed, that they pushed the price higher when they bought it back and exited at a loss.
We heard nonbelieving fundamental analysts argue the valuation wasn't justified.
A Story Stock
But this is a momentum play. It's a story stock.
And just as tech stocks charge higher because of a fascinating story, people are fascinated with Tesla's battery-operated vehicles. They are rooting for Tesla's batteries and powertrains to lessen global dependence on petroleum-based transportation and drive down the cost of electric vehicles.
So it's important to discuss the stock in that context. The stock exploded from $40 to $194.50. But when it retraced almost half of its move, which is very common for a momentum stock to do after a huge gain - I became highly confident the stock was controlled by technicians.
Let's zoom in to see what happened after the retracement from $194.5 to $116.10 (first orange dot).
First the stock bounced from $116.10 to the $140 to $160 range at the end of 2013. In the five weeks the stock spent in that trading range, the volume dried up. This decrease in volume shows indecision. When we see it after a big move higher, it typically means the buyers are waiting to see if any sellers will come in and give them the stock they are salivating over.
When the sellers had no more to offer, institutional buyers came in strong, plugging enough money into the stock to move it from the higher low of $140 (second orange dot) to $180 in just one week. Notice the stock traded twice the average weekly volume as the stock advanced (light blue arrows).
The higher low followed by the breakout to new highs allow us to draw a new upward trend line by connecting the two orange dots.
As the stock rose, so did the volume. Strong institutions are still accumulating the stock up in the $200s.
A Volume Game
Finally, we got another spike in volume pushing the stock up near the $260 level (red arrows). Sure, the stock has since been in decline for more than a month, but notice how it's declined on much lighter volume than we saw on the advancements.
Once again, this implies the stock price is lower not due to the institutional bulls becoming new sellers, but instead because the bulls have simply stopped buying. The norm would be for the bulls to wait and see if sellers come in and sell them the stock before they move it higher again.
Finally, notice the green horizontal line I drew to show where the past resistance was established based on the previous high at $194.50. Old resistance tends to become the new support level. And since that green support level is crossing the light blue uptrend line we drew, that's a strong level of future support about 4% below today's price.
I think Tesla is a good momentum stock to own. It's a member of the alternative energy sector, which has been the single strongest performing sector over the last year. Even if the new support levels I've just discussed don't hold for now, the price volume action tells us that institutions are buying the stock. That means it's likely they would step in and buy more if the stock sees lower prices.
The Oxford Club recommends always having a trailing 25% stop loss to protect your wealth. Tesla is a stock that can double from here over the next 12 months, which means we are risking 1 point to make 4. I wouldn't worry about naysayers. It's when people are no longer afraid to buy the stock that you should be concerned.
P.S. Do you have a question about technical analysis for Chris? Just comment below to ask it and he may answer it in a future column.