Tesla Motors (NASDAQ: TSLA) appeared on my bearish scan last night. The slow stochastic readings made a bearish crossover, but it was something on the weekly chart that caught my eye.
Looking at the daily chart, you can see that over the last couple of months the stochastic readings have made several bearish crossovers, but the stock continued to climb. Prior to the last two months, the stochastic crossovers had been a pretty good indicator of a pending drop in the stock price.
So what makes this time different? Why do I think that this bearish crossover in the stochastic readings is going to be an accurate bearish signal? Because this time the daily stochastics crossover is being accompanied by a weekly stochastics crossover and a possible head-and-shoulders pattern in the stock.
Looking at the weekly chart, we see how the circled areas are setting up the possible head-and-shoulders pattern. The first shoulder was formed in February 2014 and then receded to form the neckline in early May. The stock rallied back up to form the head in September and then dropped back down to hit the neckline again in March. Now we are looking at the possible formation of the second shoulder.
The other item I mentioned was the bearish crossover in the weekly stochastic readings. The crossovers on the weekly chart have been more accurate than the daily ones over the last few years. Yes, there was one crossover in late June that didn’t pan out, but the other two that have occurred since the beginning of 2014 have preceded losses of 37% and 32%. The period in late 2013 also produced a bearish crossover, but that was after spending almost six months in overbought territory.
The sentiment toward Tesla stock is somewhat bearish if you look at it compared to other stocks, but if you look at it compared to its own past sentiment readings, you will see that the sentiment has shifted quite a bit over the last few years.
Back in the spring of 2013 – before the stock skyrocketed from $40 to $190 – the short interest ratio was at 20 and eight out of 12 analysts rated the stock as a “buy.” The short interest had fallen to 4.2 by June of last year, but the analyst ratings grew more bearish with six “buy” ratings, seven “hold” ratings and one “sell” rating. Today, the short interest ratio is at 5.0 and there are now 13 analysts rating the stock a “buy” while five rate it a “hold” and three rate it as a “sell.”
The recent rally has been partially spurred by a new battery technology that the company anticipates being used for the powering of houses rather than cars. With the announcement of this breakthrough, the stock has moved higher over the last few months. However, that momentum looks to be slowing at this time.
I would look to short Tesla stock at this time, with a target in the $180-$190 range. Once the stock gets down there I would re-evaluate at that time. I would also set a stop-loss at the $270 mark, because if it gets back above that price, the chances are that it will make a run at the $290 mark again.
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