Tesla, Inc. (TSLA) sent short sellers scrambling for the exits on Wednesday, with shares lifting more than 4% to a two-month high after the company reported higher-than-expected second quarter delivery numbers. Even so, Wall Street analysts are wondering if the good news will last, given a few accounting tricks in the metrics as well as a laundry list of well-documented challenges for Elon Musk's troubled auto manufacturer. So, given what we know now, can Tesla stock hit new highs in 2019?
Wedbush Securities condensed skepticism into three questions in a timely note. First, what's the sustainable Model 3 demand without EV tax credits that expired on July 1 and European deliveries that "slipped" into the second quarter? Second, what happens to gross margins and profits as cheaper Model 3 sales comprise a higher percentage of total revenue? Finally, can the company expand more quickly overseas after a global build-out is completed in the next 12 to 18 months?
These issues may keep investors on the sidelines in the second half, despite upbeat second quarter production numbers. The company has a lot to prove after last year's self-inflicted wounds, which have taken a big toll on sentiment and buying interest. In fact, accumulation-distribution readings remain dangerous close to 2013 levels as the first week of July draws to a close, despite a 36% buying spree in the past six weeks.
In addition, the stock broke a massive triple top pattern when it sold off through $250 in April, entering a confirmed downtrend. The rally since June has now reached but not mounted new resistance, raising the odds that aggressive short sellers will reload positions on any hint of bad news. As a result, the 140 points still needed to power back to 2018 range resistance in the $380s could delay a trip to the highs for months, years, or forever.
TSLA Weekly Chart (2013 – 2019)
The stock traded sideways in a narrow range for more than two years after coming public in the mid-$20s in June 2010, finally breaking out in the second quarter of 2013. The uptrend attracted broad media attention, setting off a momentum-fueled advance that stalled above $250 in March 2014. Tesla stock added another 26 points in the next six months and settled into a volatile sideways pattern that generated a fresh buying wave after the 2016 presidential election.
The uptrend ended at $387 in June 2017, giving way to a pullback, followed by a failed breakout that posted an all-time high less than two points above the prior high in September. The price then eased into choppy range-bound action that carved three additional breakout attempts into the December 2018 high at $379. The stock fell 130 points to range support in the next five months and broke down on heavy volume, dumping to a two-year low in the $170s in June.
The breakdown cut through the .50 retracement of the 2016 into 2018 uptrend (black lines), while the bounce into July 2019 places resistance at the .382 Fibonacci retracement of the 2017 into 2019 decline (red lines). In addition, the 50- and 200-day exponential moving averages (EMAs) rolled over after range support failed and are now pointed straight at resistance near $250. Taken together, a recovery attempt could stretch as high as $265 to $270 before bears trigger another downturn.
A high-volume uptick through this bearish gauntlet would greatly improve the long-term technical outlook, generating supportive conditions for another run at resistance below $400. However, tremendous buying power will be needed to support that uptick, and that's unlikely without positive news flow that lasts more than a few days or weeks. As a result, the smart money is more likely sell the stock in the third quarter than load up on cheap shares.
The Bottom Line
Tesla stock has lifted more than 60 points since early June and is now approaching heavy resistance at and above $250, raising the odds for a downside reversal.
Disclosure: The author held no positions in the aforementioned securities at the time of publication.