Tesla, Inc. (TSLA) has failed to attract buying interest in the past month, despite beating third quarter top- and bottom-line estimates on Oct. 21. Investors have ignored bullish commentary and a string of upgrades since the report, highlighting concern about the stock's sky-high price-to-earnings ratio (P/E) of 797. Short-term price action strongly suggests that momentum traders have left the building, leaving shares in the hands of true believers and long-term market players.

Key Takeaways

  • Tesla stock entered a symmetrical triangle pattern in September.
  • This pattern may be nearing completion, ahead of a trend move higher or lower.
  • A loyal shareholder base has held intact through this correction.
  • Declining relative strength raises the odds for a selloff into the 200-day exponential moving average (EMA) just under $300.

Accumulation readings have held near highs during this period, showing no increase in selling pressure. Of course, price rate of change has plunged since mid-summer, with the stock trading at the same price level it first struck almost three months ago. Technical traders will point to the bullish triangle pattern in place since that time, but Tesla has now crossed into weekly and monthly stochastic sell cycles, warning that weakness could persist into the first quarter of 2021.

The stock sold off in sympathy with COVID beneficiaries earlier this week, dropping more than 12%. However, it's still holding range support and the 50-day EMA, which has acted as a rally springboard four times since September. The October low at $379 marks the line in the sand for bulls, with a violation also breaking triangle and moving average support. On the flip side, short sellers probably need to cover positions if Tesla can trade above the October high at $466.

Wall Street consensus on Tesla has deteriorated to a "Hold" rating despite the flurry of upgrades, based upon nine "Buy," nine "Hold," and a whopping nine "Sell" recommendations. Price targets currently range from a low of just $40 to a Street-high $578, while the stock opened Thursday's session more than $35 above the median $379 target. High valuation underpins these cautious ratings and targets, warning that the company may need to build a stronger balance sheet to sustain higher prices.

A symmetrical triangle is a chart pattern characterized by two converging trendlines connecting a series of sequential peaks and troughs. These trendlines should be converging at a roughly equal slope. Trendlines that are converging at unequal slopes are referred to as a rising wedge, falling wedge, ascending triangle, or descending triangle.

Tesla Weekly Chart (2015 – 2020)

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

A stairstep advance topped out at a split-adjusted $77.40 in June 2017, giving way to a shallow downtick that accelerated to a two-year low in the mid-$30s in June 2019. Buying interest surged in October, yielding a December breakout that generated strong momentum buying interest. The rally faded in the $190s in February 2020, ahead of a pandemic decline that tested breakout support successfully. The stock completed a V-shaped recovery pattern three months later and broke out once again, lifting to an all-time high at $502.49 just one day after its five-for-one stock split.

The stock sold off to $329.88 four sessions later, completing the first wave of a symmetrical triangle that has entered a fifth wave earlier this week. It is a dangerous time for bulls because this classic pattern traditionally carves five waves and shifts into trend mode, breaking resistance on the upside or support on the downside. Right now, Tesla is trading much closer to support than resistance, telling market players to keep close watch on the $380 level.

A stock split is when a company divides the existing shares of its stock into multiple new shares to boost the stock's liquidity. Although the number of shares outstanding increases by a specific multiple, the total dollar value of the shares remains the same compared to pre-split amounts, because the split does not add any real value

The Bottom Line

Tesla stock posted an all-time high in September and entered a trading range that has carved a classic symmetrical triangle pattern. Technical measurements suggest that this pattern is nearing completion, setting the stage for a breakout or breakdown. Relative strength cycles give sellers a modest edge in this bilateral scenario.

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