Tesla, Inc. (TSLA) has generated windfall profits for short sellers since breaking major support near $250 in April 2019, dropping more than 25% to the lowest low since December 2016. However, technical stars are now aligned for a major short squeeze that could add 40 to 60 points to the shares in the coming weeks. A large and complacent short selling crowd should fuel this uptick, which could start at any time.
The four-week downdraft has reached deep Fibonacci support, while long-term relative strength has dropped into the most extreme oversold technical reading in the stock's public history. This is an incendiary combination, warning complacent short sellers that it's time to take profits and get out of the way or risk getting trampled while trying to escape the burning theater through a small exit door.
There's little argument that Tesla faces major survival challenges in the coming months, but downtrends rarely move in a straight line because they attract a large crowd of weak-handed short sellers who need to be punished by relentless upticks. That rocket fuel is now in place, with short interest rising above 37 million for the first time since June 2018, just before a three-week 100-point squeeze.
TSLA Long-Term Chart (2010 – 2019)
The stock came public at $19.00 in June 2010 and fell quickly to the all-time low at $14.98. A rally stalled in the mid-$30s at year end, with that level marking resistance into a 2013 breakout that attracted intense momentum buying interest. The uptrend ended at $291 one year later, yielding more than two years of range-bound action, ahead of a April 2017 breakout that posted an all-time high at $389.61 in September.
June, August and December 2018 breakout attempts failed while controversial CEO Elon Musk got into hot water with the SEC for unsubstantiated claims on Twitter. Model 3 production shortfalls added to deteriorating investor sentiment, generating a steady 2019 downtick that broke the two-year trading floor near $250 in April. Trend momentum then took charge, dumping the stock more than 100 points in just eight weeks.
The monthly stochastics oscillator has carved just four major sell cycles since the 2010 public offering, with the last occurrence beginning in April 2019. The indicator has now dropped into the most extreme oversold technical reading in nine years, setting off a contrary buy signal that will take a bullish crossover to confirm. The deep dive also indicates that selling pressure, at least for now, is nearing its end.
TSLA Short-Term Chart (2016 – 2019)
The decline has also penetrated the .786 Fibonacci retracement of the February 2016 into September 2017 uptrend. This level has a well-earned reputation for triggering long-lasting reversals, but April's textbook breakdown has established major resistance near $250 that is unlikely to be mounted without a long and protracted struggle. As a result, that price zone marks the final target for the squeeze and a potential short sale opportunity.
The on-balance volume (OBV) accumulation-distribution indicator confirms the massive exodus of long-suffering shareholders, dropping to the lowest level since 2013. It will take months or years to replace this lost sponsorship under the best of circumstances, suggesting that Tesla will eventually get bought by a well-financed suitor or go bankrupt. It also tells informed market players there's little or no chance that a second quarter squeeze will mount new resistance.
The sell-off has tracked the declining 50-day exponential moving average (EMA) since the Jan. 17 gap, and it's unlikely that the next rally will remount this formidable barrier. In turn, the short squeeze may not reach the April breakdown, forcing a lower reward target. At a minimum, the bounce should reach the .618 Fibonacci retracement level at $236, which is about 45 points above Monday's opening print near $191.
The Bottom Line
Tesla stock has reached hidden support after a major breakdown and could squeeze shorts with a vertical bounce that tests new resistance between $235 and $250.
Disclosure: The author held no positions in the aforementioned securities at the time of publication.