Tesla, Inc. (TSLA) reports earnings after Wednesday's closing bell, with analysts expecting the controversial automaker to report a loss of $0.40 per share on $6.44 billion in second quarter revenues. The stock fell more than 4% after the company reported a much larger than expected first quarter loss in April, ahead of an additional 29% decline into June. It has carved a V-shaped recovery since that time but still hasn't cleared heavy resistance between $250 and $270.
Electric vehicle tax credits expired on July 1, adding a new sales challenge, but Tesla has reported excellent progress completing the Chinese gigafactory, which will drive future profits. The company also delivered more vehicles than expected in the second quarter, easing bearish sentiment while lifting the stock more than 75 points off June's multi-year low. Even so, high debt and missed deadlines continue to plague the company, keeping many investors on the sidelines.
CEO Elon Musk has a lot to prove after 2018's self-inflicted wounds, which continue to weigh on Wall Street sentiment. The stock's accumulation readings have come off five-year lows in recent weeks, but the shallow trajectory reflects continued skepticism about the company's future, despite the second quarter's upbeat news flow. Fortunately for bulls, Musk has exercised self-discipline during this period, avoiding schoolyard brawls with short sellers and the SEC.
The bounce has now pierced the bottom of the massive trading range broken in May, but the stock is still trading under major resistance at the 50-month exponential moving average (EMA) near $270. That barrier marks the dividing line between bull and bear power, with a breakout setting off buying signals that could presage a trip back above $380. Conversely, a reversal at resistance after the news could be devastating to the recovery effort, exposing a retest at the June low in the $170s.
TSLA Long-Term Chart (2010 – 2019)
The company came public in the upper teens in June 2010 and entered a trading range that broke to the upside in 2013. Momentum players piled on to the nascent uptrend, generating a vertical advance that ran out of stream above $260 in 2014. It cleared that level after the 2016 presidential election, topping out in the $380s in June 2017. Five breakout attempts failed into the fourth quarter of 2018, while pullbacks found support below $250.
A positive feedback loop kicked into gear after the December 2018 reversal at $379, reaching range support in March 2019. The stock broke down on heavy volume in May, descending in a straight line into the $170s, which marked the lowest low since February 2016. The strong uptick since that time has reached the .382 Fibonacci retracement level of the six-month downtrend, which has roughly aligned with resistance at the range breakdown and 50-month EMA.
TSLA Short-Term Chart (2016 – 2019)
The 50-month EMA looks like a major obstacle at this point, breaking down after successful tests in 2016 and 2018. As a result, bears hold a major edge into this week's confessional, predicting that it will take tremendous buying power to reinstate support between $250 and $270. However, this highly controversial issue could break the barrier by trapping aggressive short sellers with a better-than-expected second quarter and much higher fiscal year 2019 guidance.
The on-balance volume (OBV) accumulation-distribution indicator hit an all-time high in June 2018 and entered an aggressive distribution phase, driven by departing institutions. It posted the lowest low since 2013 in June 2019 and bounced, but modest progress in the past seven weeks has barely registered on the price chart. In turn, this tells newly minted bulls to curb their enthusiasm because many dominoes have to fall in Tesla's favor to power a trip back to the 2018 high.
The Bottom Line
Tesla has bounced off June's deep low and rallied into heavy resistance, raising the odds for a downturn after this week's earnings report.
Disclosure: The author held no positions in the aforementioned securities at the time of publication.