Tesla's Lack of Disclosure Raises Red Flags

Tesla Inc. (TSLA) stock has plummeted in recent weeks, dropping more than 60% off the all-time high at $969 posted in February. The decline has caught many shareholders off guard because the stock held up well in the weeks following the China outbreak, even though the company had to close the Shanghai gigafactory for nearly two weeks. That venue is back online, but the stock is now reacting to wealth destruction that is likely to trim North American sales in coming quarters.

CEO Elon Musk has been making matters worse in recent weeks, calling the coronavirus "dumb" and refusing to close the Fremont factory despite a sheriff's order. Hundreds of public companies have pulled prior earnings guidance, but not Tesla, which is apparently sticking to the old script despite the pandemic. That seems kind of "dumb" when other auto manufacturers have closed their plants to protect their workers and lower costs.

Fortunately for shareholders, the sell-off has now reached major support at the October 2019 breakout around $350, which under normal circumstances would issue a strong buying signal. However, high volatility has sharply lowered the reliability of support and resistance levels, telling sidelined investors to wait for more favorable sentiment and technical conditions before jumping on board.

It also makes sense to wait until Musk clears the air, dealing with the Freemont plant violation and the likelihood that Model 3 sales will fall well short of previous guidance. That honesty would help tremendously, but as we know from his 2018 encounter with the SEC, there are no guarantees that Musk will do the right thing unless forced through litigation. In the meantime, the vast majority of sidelined investors should just sit on their hands and pass on the buying opportunity.

TSLA Daily Chart (2016 – 2020)

Chart showing the share price performance of Tesla Inc. (TSLA)

The stock broke out above two-year range resistance in the upper $30s in 2013 and entered a historic uptrend, lifting into the $290s in the summer of 2014. It then settled into a relatively narrow trading range, bounded by resistance at the high and support in the $190s. A 2016 breakdown found willing buyers, but range resistance held intact until a breakout in the second quarter of 2017 lifted into the $380s.

It underperformed badly between June 2017 and May 2019, stuck once again in narrow range-bound action. Model 3 production issues triggered a range breakdown at that time, dumping the stock to a three-year low in the $170s in June. That marked an excellent buying opportunity, ahead of a rapid recovery that reached 2017 resistance for the fifth time in December and triggered an immediate breakout.

Momentum players took control into February, more than doubling the stock price into February's all-time high. It built a small double top at that level and broke down less than two weeks ago, entering a vertical slide that relinquished nearly 300 additional points into this week's low at $350. This level marks the center point of previous resistance, raising the odds for a recovery wave that could reach the descending 50-day exponential moving average (EMA) near $600.

The on-balance volume (OBV) accumulation-distribution indicator topped out in September 2017 and failed a July 2018 breakout attempt, triggering an aggressive distribution wave that ended at a six-year low in May 2019. Intense buying interest into January 2020 completed a round trip into resistance, yielding a breakout that confirmed the powerful uptrend. OBV has now pulled back to support with price, providing another technical reason to get on board. 

Despite growing technical tailwinds, investors are entitled to better information about the pandemic's impact on Tesla's bottom line, with a statement from the company long overdue and an obstacle to buying interest. Hopefully, that will come soon because it is less than two weeks until the end of the first quarter, and we know that all sorts of other businesses have watched their sales crash to multi-year lows in March.

The Bottom Line

Tesla stock has reached technical support, but the company's lack of disclosure remains a major red flag for investors.

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

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