Tesla in freefall - soon to break $600?

25 mai 2022

Tesla has come up on the radar and with the drawdown moving to 45% in the past 34 trading sessions traders are asking if we can see this trade sub $600 soon. Obviously, sentiment is shot to pieces and it's a tough environment for any listed entity, with few wanting to take on risk especially in high beta growth equities, regardless of the news flow from the company.

Fundamentally, we can focus on the big underperformance of Tesla since Elon Musk disclosed his intention to purchase Twitter - There are multiple schools of thought on why this is the case, although Musk has tried to assure the market that his focus on Tesla will not wane. China is slowing down because of its Covid zero policy and we’re now seeing earnings downgrades from analysts due to the loss of production in Shanghai, with a view that the slowdown is going to genuinely impact margins and earnings.

Earnings downgrades are usually laggards to price in this type of market anyhow, and the market discounts known news far more rapidly than any analyst can downgrade earnings.

What’s important here is the trend and it's clearly lower – this makes me incredibly cautious in trying to catch what is essentially a falling knife. Naturally, broader market sentiment is key, so if the S&P500 and NAS100 can in fact turn higher, and we see rate hikes being priced out of the swaps curve, with a further liquidation of USD longs, then Tesla should turn higher. A big ‘if’ of course.

We can see that Tesla is oversold but it's been that way for a while, and yet it keeps falling. Timing is always key, and it depends on one’s strategy – if trading momentum or a trend follower - notably for swing/position traders - then you’re likely short already and not seen an exit signal yet.

For scalpers and day traders there are a different set of conditions and considerations. One aspect is that price is 31% below its 50-day MA - aside from March 2020 we’ve never seen such a differential since Tesla floated – is this a sign the elastic band has been pulled too far and we could see mean reversion? Perhaps, but when markets are in freefall and we’re seeing both fundamental and technical factors impacting then what’s oversold can continue to be so.

Tesla is one to put on the radar…I think this can trade into $600 through June, but when I think of the distribution of outcomes the prospect of a short-term rally into $650/80 also looks promising, but I think this gives shorts better levels to look at.

CW