After Tesla Goes Parabolic, The Risk Of Reversal Is High

Don’t Chase Prices Or You Might Get Burned

Tesla (TSLA) is riding a wave of bullish sentiment that has sent the stock to new all-time highs. A wave of upgrades over the past two weeks sparked a rally that went parabolic this week. Up more than 100% since the end of the year, the long-term Tesla investors are certainly cheering.

With price action rising so far so fast, you have to ask yourself what can be driving this rally? Aside from positive analyst notes citing the company’s long-term outlook, there really isn’t much. To draw a comparison with Bitcoin, the rally in Tesla is a bubble and one that will eventually pop. When Bitcoin’s (BTC/USD) bubble popped in 2018 it shed 80% of its value.

Tesla and its eccentric leader Elon Musk are popular and electric cars are the wave of the future. It makes sense the market wants to be involved. The problem now is the valuation is so far-fetched there is no point of comparison. Automaker GM (GM) pulls in over $140 billion in annual revenue and trades at a mere 8X forward earnings while Tesla, Tesla brings in less than a third that amount and trades at 110X earnings (and its profitability is questionable). Now, Tesla is more than just an automaker but you get my point.

China Operations Impaired By The Coronavirus

Today’s news includes a report from Tesla its Chinese operations are being impacted by the coronavirus outbreak. Tesla reports February deliveries will be delayed. Execs expect production losses will be made up in subsequent months but that is assuming many things. For one, there is no timetable on when the Shanghai plant will reopen. The longer it is closed the bigger the impact on Q1 results. If the virus outbreak lingers it could be months before the factory and China are back to full speed.

Despite this risk, analysts Dan Ives of Wedbush remains bullish on Tesla’s performance in the region. “We are currently modeling ~20K deliveries in the key China region for the March quarter. In our opinion, the current situation is more bark than bite as the aggressive trajectory of Giga 3 production and demand out of Shanghai look very strong out of the gates and the potential to hit 150k units/demand out of this region over the next year still remains intact,"

Even so, Ives rates the stock only at hold with a low price target of $710. Compared to Tuesday’s closing price of $880 that’s a difference of 20%. Enough to put Tesla in a bear market. Analysts at Barclays are less optimistic. They just initiated Tesla at a sell with a target near $300 and they are not the only one to see Tesla this way. Fully 25 of the 32 analysts covering the company are neutral or bearish, half of them are outright bearish with a consensus target below $500.

The Technical Outlook Isn’t Pretty

On a technical basis, the parabolic move up in Tesla is pure momentum and short-covering. Worse yet, the candle formed in Tuesday trading is scary looking and threatens to cap price action for the foreseeable future. By itself, the candle is a very telling shooting star doji. Add in today’s decline and the candle confirms a top if not an outright reversal of market action.

The biggest risk for bulls now is the volume of trading that occurred with the move above $900. The daily total exceeded 5X the 30-day average and came in well above any previously set high. That’s a lot of potential losers and the losses are already piling up. If those traders get spooked and shaken out of the market share prices will plummet.

With price action in decline, where might support be found? The first target is near $780 and the top of the long green candle that formed before the shooting star doji. This level coincides with a 25% retracement of the 2019/2020 bull market but is already being tested. If this level fails the next target is near $667 and the 38.2% retracement level. After that is the $572 level and the 50% retracement level.