A 7% cut in full-time employment isn't sitting well with Tesla, Inc. (TSLA) shareholders, who have dumped the stock to the lowest low since October. It's clear that they can't reconcile company comments that workforce reductions are needed to lift sales of the troubled Model 3 sedan when common sense dictates that greater output requires more workers. Oddly though, this narrative fits into the upside-down universe we've grown to expect from CEO Elon Musk in recent years.

The Model 3 high-end backlog decreased significantly in 2018, but the standard battery won't be ready for another four to six months, increasing the odds for a sales slump that further deteriorates the company's weak cash flow position. Tesla's high-yield bonds reflect this stress, with the 2025 issue dropping to 88 cents on the dollar last week. And ominously, a $920 million convertible bond payment has to come out of company coffers in March if the stock isn't trading at or above $360.

TSLA Weekly Chart (2014 – 2019)

Long-term chart showing the performance of Tesla, Inc. (TSLA) stock

A momentum-fueled uptrend ended at $292 in September 2014, giving way to a decline that found support at the May low near $177. An early 2015 recovery wave reversed at range resistance in July, dropping the stock back to range support in January 2016. It then broke down and plunged through the 200-week exponential moving average (EMA), dropping to a two-year low at $141. That marked a selling climax and buying opportunity, ahead of a strong uptick that reinstated range support a few weeks later.

A third test at range resistance in February 2017 triggered a reversal, followed by an April breakout that attracted widespread buying interest. The uptrend stalled in June after reaching within 14 points of $400 and turned tail, dropping back to $300 in July. A September breakout attempt failed, generating a secondary downturn that broke 2017 support in March 2018, dumping the stock to a 52-week low at the 200-week EMA. That level found committed buyers once again, ahead of a two-month trip back to range resistance.

TSLA Daily Chart (2017 – 2019)

Short-term technical chart showing the performance of Tesla, Inc. (TSLA)

Two-sided price action has continued in the past seven months, with an extended retracement to the 200-week EMA in the fourth quarter, followed by a trip back to resistance in December 2018. The reversal into January 2019 marks the fourth failure to break June 2017 resistance, while the stock has now bounced at the 200-week EMA five times in the past three years. This convoluted price structure sets the stage for a major breakout or breakdown in the coming months.

The stock posted significant volume divergences during rallies into August and December 2018. The on-balance volume (OBV) accumulation-distribution indicator descended in a straight line between June and October in reaction to Model 3 deadlines and Musk's unsubstantiated buyout tweet. The SEC settlement triggered a reversal, but the two-month uptick between October and December posted anemic buying pressure, raising the odds for another failed breakout attempt.

The six-week decline has now reached critical support at the 2014 high (blue line) near $290. OBV has dropped into the early January low at the same time, with a price breakdown likely to dump the indicator into a test at the October 2018 low, which marks the lowest low since February 2016. The 200-week EMA has now lifted to $270, or about 13 points under this morning's opening print. It needs to hold that level or set off long-term sell signals that presage a breakdown from the two-year trading range.

Conversely, significant buying power is needed to overcome months of heavy distribution and lift OBV back toward the 2018 high. Many weeks of good news will be required to accomplish that task, given the aggressive exit by smart money since June 2018. Even so, there is little for sidelined players to do at this point, other than play the dip with a trailing stop to guard against the next unwelcome surprise.

The Bottom Line

Tesla stock has dropped to a three-month low and could test two-year range support in the coming weeks. Bears have the upper hand after an institutional exodus, raising the odds for a breakdown.

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