Shares of troubled automaker Tesla, Inc. (TSLA) closed at the lowest low since March 2017 on Monday, Oct. 8, dropping 66 points in just five sessions. The stock is now testing the April 2 intraday low at $245, which marks the lowest low of 2018. The rise and fall since Elon Musk's weekend SEC settlement has been jaw dropping, without precedent in U.S. corporate history, and the colorful but erratic CEO has no one to blame but himself.

Bullish Model 3 production numbers and the SEC deal, just one day after Musk walked away from a settlement, should have sounded the all-clear for Tesla's long-suffering shareholders. Inexplicably, the CEO chose to ridicule the regulatory body on the same day that the presiding judge demanded deal justification, dropping the stock into a selling spiral that is now testing deep support.

Contrary to Musk and shareholder belief, it's the SEC's job to protect all market participants, including short sellers. Individuals and hedge funds wishing to sell short have to jump through a series of regulatory hoops, updated in response to the 2008 economic crisis. The April 2009 press release from the SEC specifically lists "limiting upward market manipulations" as a legitimate short selling activity, a prescient addition given Musk's "funding secured" tweet and improper interpretation of settled law. (See also: David Einhorn Blasts Tesla, Likens it to Lehman.)

TSLA Long-Term Chart (2010 – 2018)

 

The stock came public at $19.00 in June 2010 and rallied into the mid-$30s at year end. That level stalled progress into a 2013 breakout that attracted a massive momentum bid, lifting the stock above $200 in February 2014. It topped out at $291 in September and turned lower, entering a volatile correction that found support near $140 in January 2016. That low marked an excellent buying opportunity, ahead of a two-legged advance that stalled above $380 in June 2017.

A September breakout attempt failed, giving way to a volatile series of lower highs and lower lows that ended at $244.59 in April 2018. Keep that price level in mind because Monday's low has initiated the second test at support in the past five weeks. A breakdown would be significant, opening the door to intense downside that could reach well below $200 before dip buyers have an opportunity to reload positions.

The monthly stochastics oscillator has carved a brutal pattern since February 2018, aborting an emerging buy cycle and dropping to the most extreme oversold reading since 2015. The decline has reached the 50-month exponential moving average (EMA) at the same time, with two 2016 incarnations generating buying opportunities. Taken together with the oversold signal and proximity to the April low, the stock could deny short sellers once again and bounce into a multi-week recovery attempt. (For more, see: Elon Musk Out as Board Chairman of Tesla, Settles With SEC.)  

TSLA Short-Term Chart (2017 – 2018)

 

Price action since June 2017 has been volatile but breath-taking, with jagged rallies and declines typical in story stocks that carry exceptionally high short interest. The zone around $300 has become the primary battle line in this complex price structure, as evidenced by the Oct. 1 rally gap and Oct. 2 reversal. More ominously, the pattern since April 2018 has now completed a bearish inverse cup and handle pattern (blue line) that yields a measured move target near $110 following a breakdown.

The on-balance volume (OBV) accumulation-distribution indicator could decide Tesla's fate in the coming weeks, with shareholders abandoning ship at an aggressive pace since the indicator posted an all-time high in June 2018. It has now dropped to the lowest low since February 2016, when the stock was trading nearly 110 points lower than Monday's close. This bearish reading lends credibility to a prediction that a breakdown at support in the $240s is likely to generate ferocious downside. (See also: Tesla Directors Proposed James Murdoch as Chairman: Report.)

The Bottom Line

Tesla stock has arrived at deep support following a brutal self-inflicted wound and could bounce once again in the coming sessions. However, technical damage is taking its toll, raising the odds for a breakdown that eventually reaches $100 to $120. (For additional reading, check out: Tesla Owners Can Have Images Sent to Deep Space.)

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

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