Tesla, Inc. (TSLA) stock will open Friday's session less than 100 points below February's all-time high at $969, following a dramatic recovery of 500-plus points off March's pandemic low, setting the stage for a potential breakout that lifts the electric vehicle manufacturer into quadruple digits. That would mark a historic accomplishment in the traditionally cyclical automotive sector, especially with combustion engine rivals cutting production due to high unemployment rates.
Even so, a breakout would be speculative because the company was forced to shut California operations in March, cutting into first half sales. The company is also dropping North American prices by 6% in an attempt to sell more vehicles, but that also means it will earn a lower profit on each sale at a time that tens of millions are out of work. Given these developments, a second wave could be devastating to the bottom line, perhaps trapping shareholders in a second major decline.
Automakers hope that demand for personal vehicles will rise due to a growing aversion for public transportation, but it will be hard for Tesla to achieve profit and revenue targets unless employment numbers rise sharply in coming months. Rapid reopenings across the globe have increased optimism for this bullish outcome, but few analysts now expect a V-shaped economic recovery before 2021, at the earliest.
Reasons to Be Optimistic
However, there are reasons to believe that Tesla will prosper into the middle of the decade. First, earnings and revenues for the first quarter of 2020 beat estimates, highlighting continued demand despite the pandemic. Margin and free cash flow also rose in the first quarter, despite stiff headwinds. Second, the order book held the highest ever backlog at the end of March, with deliveries lagging due to the shutdowns. Third, California threw in the towel quickly and let the Fremont factory reopen when CEO Elon Musk threatened to shut down operations and move to the Midwest.
Technically speaking, there are now few obstacles to a breakout above $1,000. The plunge into March turned on a dime at new support generated by the December 2019 breakout above 30-month resistance, confirming the new trading floor. Buying power then surged during the bounce, lifting accumulation readings back to February highs. Finally, relative strength indicators are cooperating with the effort, with the monthly stochastic oscillator engaged in a buy cycle that still hasn't reached the overbought level.
TSLA Short-Term Chart (2017 – 2020)
The stock topped out at $387 in the second quarter of 2017, giving way to a trading range with support below $250. It broke down in May 2019, entering a downtrend that posted a two-year low one month later. That price action completed a selling climax, ahead of a recovery wave that remounted broken support in October. The subsequent uptick reached range resistance in December, yielding an immediate breakout that generated intense momentum buying interest.
Short sellers got crushed after the breakout, with the uptick adding nearly 600 points in seven weeks before topping at $968.99 on Feb. 4. A failed breakout attempt later in the month completed a small double top, ahead of a steep decline that gave 100% of the upside before bouncing strongly at $350 in March. The subsequent buying impulse carved a bullish Elliott five-wave advance, stalling at $870 and easing into triangular consolidation that has persisted for the past five weeks.
The pattern since February has carved the outline of an inverse head and shoulders breakout pattern, although the right shoulder doesn't quite reach the first quarter high. Nevertheless, bullish expectations remain the same, with a rally into quadruple digits targeting a measured move up to $1,500. While that uptick might not match the trajectory of the current bounce, it would still reward shareholders with windfall profits.
The Bottom Line
Tesla stock has confirmed the December breakout and could trade well above $1,000 in coming months.
Disclosure: The author held no positions in the aforementioned securities at the time of publication.