Having gapped lower and closed in the red on January 4th, the first trading day of the year, TSLA has continued to slide. Today, the stock is trading below $180 for the first time since May 2014, an 18-month low. Note: Tesla is expected to report earnings on February 10th.
Note the annotations on this weekly chart. TSLA failed to make new highs in the summer and fall of 2015 and has faded lower since. The previous lows, from $177-$182, are marked with green arrows. The stock is currently trading at $174, a level last seen exactly 2 years ago in February 2014, when TSLA was trending higher.
Having transformed the global car market with a truly sexy lineup of luxury EVs (electric vehicles), Tesla became one of the hottest momentum stocks of 2013 - 2014. The stock went on to reach a high of $291 in late 2014, after Elon Musk announced that Tesla would open source its patents in a drive to kick-start the electric car market and speed the development of an electric charging infrastructure.
Fueled by the excitement of new product launches for the Tesla Powerwall and the new Model X, TSLA made one last run to challenge its old highs. After failing to close above $285, the stock faded lower and began trading below its 200 day moving average in the fall of 2015.
Here is a good Tesla video post that my friend, Olivier Tischendorf made in December 2015 highlighting key levels in the stock. He outlined some ways Tesla shareholders might manage their risk as the stock reached "a crucial level". TSLA was trading north of $225 when this video was released.
The topping and sideways consolidation of late 2014 - 2015 now seems to be turning into a "stage four" downtrend. While the stock may have a short-term bounce higher in the weeks ahead, or find longer-term support in the $115 area, we must be aware that its strong momentum phase and uptrend are behind us.
So what does this mean for us, as traders and investors? Well, the risk with a high-profile former leader like TSLA is that its declining share price attracts "bargain hunters" who are hoping to buy a stock "cheap". Unfortunately, these people often buy dips in a trend that has already run its course. You can buy the dips in a strong uptrend and come out all right, but buying dips in a downtrend is a losing strategy.
Why? Because a downtrend is a series of lower highs and lower lows. Will you have the patience and the capital reserves it takes to sit through these long declines? Yes, some share price rebounds are sharper and faster than others, but some stocks take years to base out and begin a new uptrend. Do you really want to tie your money up with a losing stock, or worse, average down into a loser, when you could preserve your capital and your wits as you wait for better opportunities to appear?
"The small investor is typically moved by ignorance and passion..." - John Train.
Yes, I'm a big fan of Tesla the company and its amazing co-founder, Elon Musk. Do I love the stock here? No.
We must learn to separate the two, a company and its stock, or watch our money evaporate in some vain pursuit of "bargain hunting" fanboy-ism. Emotional involvement in companies is best avoided when buying and selling stocks. Falling "in love" with a company and its products means your judgement will be clouded when it is time to make crucial decisions to buy or sell the stock.
1. Paul Tudor Jones on Trading and Risk Management.
2. Marty Schwartz: Market Wizards Interview Highlights.