It's been a good year for Tesla, Inc. (TSLA) and CEO Elon Musk, with the stock up more than 60% in the past three months. However, the momentum-fueled advance that erupted after third quarter earnings is now entering a zone of heavy resistance, raising the odds for a reversal that tests or fills October's gap between $265 and $290. As a result, traders still on board this moving train should consider taking profits and hitting the sidelines, waiting for a low-risk re-entry at lower prices.

Despite the advance, the stock is up less than 4% in 2019 after traversing a broad trading range in place since the end of 2016. Five breakout attempts between 2017 and 2019 have failed to clear range resistance between $350 and $390, establishing a reversal zone that is now in play after Wednesday's brief spike above $350. While the rally can still add points in the short term, the reward-to-risk profile is deteriorating rapidly, warning market players that the uptick may be nearing its end.  

Tesla stock can break out in the coming year, but it has considerable work to do after this year's slide to a three-year low. Many shareholders jumped ship during the freefall, creating a vacuum that needs to be filled with fresh capital. The uptick since August has improved those depressed readings, but they're nowhere close to the level required for a sustained a breakout above multi-year resistance. Indeed, that event might have to wait until Tesla's worldwide production capacity comes online and sales numbers improve.

TSLA Long-Term Chart (2011 – 2019)

TSLA
TradingView.Com

The stock consolidated in a narrow range pattern for more than a year after coming public in 2011 and took off in a powerful trend advance that posted historic gains into the 2014 high at $291.42. It underperformed in the next two years, grinding sideways in a broad range with resistance at that level and support at $210, and turned higher after the presidential election.

A 2017 breakout made rapid progress into the $380s and reversed, finding support near $290. That level broke at the start of 2018, generating a decline into the $240s in April while initiating a testing period that featured three failed breakout attempts. The stock broke the prior low in April 2019 and dropped like a rock into June, while a bounce into mid-summer failed to mount new resistance. 

The Oct. 24 continuation gap cleared the barrier, resurrecting support, while the uptick into November has now reached the .786 retracement of the sell-off between the 2017 high and 2019 low. This marks a high-odds reversal zone, but strong momentum indicates that price could exceed this barrier before selling pressure and a reversal kick into gear.

TSLA Short-Term Chart (2017 – 2019)

TSLA
TradingView.Com

The post-earnings gap aligns perfectly with resistance in place between 2014 and 2016, highlighting strong support in this price zone, while the three-month rally has taken the shape of an Elliott five-wave advance. The stock may now be engaged in the third and final impulse wave, again raising the odds for a multi-week reversal in the coming weeks.

The on-balance volume (OBV) accumulation-distribution indicator raises the biggest red flag in the set-up, entering a distribution phase after the June 2018 high. OBV fell to the lowest low since 2011 in the second quarter of 2019, while buying pressure since that time has failed to lift the indicator off deep lows. This warns that short covering has generated the majority of rally points while the smart money continues to sit on their hands.

The Bottom Line

A brutal short covering rally may be nearing its end, raising the odds that Tesla stock will reverse and test new support between $260 and $300.

Disclosure: The author held no positions in the aforementioned securities at the time of publication.