Controversial automaker Tesla, Inc. (TSLA) is slumping badly in this tough summer market, dropping like a rock after a six-week oversold rally reversed in July at major resistance between $250 and $270. Adding to growing shareholder anxiety, the stock just broke intermediate support near $230, exposing a second trip into the psychological $200 level and a critical test at June's three-year low at $176.99.
The timing couldn't be worse because Model 3 production is finally ramping up and CEO Elon Musk is avoiding self-sabotage, unlike his many 2018 adventures. The problem is two-fold. First, Wall Street is concerned Tesla doesn't have a viable path to profitability after it reported a much greater-than-expected loss in July's quarterly report. Second, and more urgent at the moment, Tesla's $2 billion Chinese gigafactory may come online at the same time that local sentiment toward all-things-American drops to a generational low.
In addition, Chinese auto sales have now fallen 13 months in a row after July's just reported 3.9% year-over-year decline, indicating slumping demand. Tesla needs international sales badly to achieve long-term goals, and China has always held a major role in that objective. Failure could be catastrophic, especially with unresolved European trade issues and a bond market that's flashing unmistakable signs of an impending economic slowdown.
Tesla also needs to address a growing list of sentiment-killing safety and quality issues. In just the past two weeks, the National Highway Safety Administration issued a cease and desist letter about unsubstantiated safety claims, an owner sued the company about limited battery capacity, and a Model 3 caught fire in Russia. Although these are typical start-up issues, Tesla's reservoir of good will and trust has shrunken badly in the past year, making it tough to shake off negative feedback.
TSLA Weekly Chart (2013 – 2019)
A 2013 uptrend caught fire, lifting the stock in a momentum-fueled uptick that stalled above $250 in the first quarter of 2014. It posted a higher high above $290 a few months later and settled into a choppy trading range with support at $175. That mixed pattern held intact until the 2016 presidential election, which triggered a strong burst of buying power that broke range resistance in the first quarter of 2017.
The uptick stalled above $380 in June 2017, yielding four failed breakout attempts into December 2018. Sell-offs during the period ended between $245 and $260, carving support that broke to the downside on heavy volume in April 2019. The decline finally ended at the 2016 rally inception in June, yielding a short squeeze that stalled at new resistance in July. The 200-week exponential moving average (EMA) has also taken up resistance in that price zone, generating a barrier that may be impassable for now.
TSLA Daily Chart (2016 – 2019)
The on-balance volume (OBV) accumulation-distribution indicator surged to an all-time high in June 2018 when the stock was trading near $370 and entered a distribution phase that accelerated to a six-year low in June 2019. This bearish pattern tells market watchers that institutions have given up and abandoned long-term positions, moving back to the sidelines. More ominously, OBV barely budged during the six-week recovery wave, indicating that few former shareholders are rebuilding positions at this juncture.
The bounce into July reversed at the closely aligned .382 Fibonacci sell-off retracement, breakdown level, and 200-day EMA. In turn, this confirms that the stock has entered a primary downtrend that could undercut the June low in the $170s. That would be bad news for long-term shareholders who are still hanging tough because the violation will expose additional downside into the 2016 low at $141.
The Bottom Line
Tesla stock may enter a critical test at June's deep low in the $170s, with the continued exodus of shareholders raising the odds for a secondary breakdown.
Disclosure: The author held no positions in the aforementioned securities at the time of publication.