Tesla stock: Fundamental and technical analysis


At the beginning of summer I made two reviews of the Tesla stock that you can check out here and here. Actually, those analyses of the Tesla shares have been by biggest delusion ever. At that time, one Tesla share cost about 800 USD, and that seemed to be extremely expensive, based on fundamental analysis and indicators. Only three months have passed since then, but the stock itself and the market in general have changed in quality and structure. The previous analysis became irrelevant. So, in this article we are going to determine a new development scenario in the multi-time frame, from a few weeks to a few years.

The article covers the following subjects:

Fundamental analysis

Even if using the terms “Fundamental analysis” and “Tesla stock” in one sentence has become improper, we can’t fully ignore this stage. There’s no point in mentioning the company’s multipliers: they haven’t changed radically in the past three months. Despite the stock price’s latest correction, economic analysts still believe that Tesla is overhyped.

Elon Musk’s love for playing with private investors’ sentiment using his Twitter and shocking public speeches is quite famous. I wrote about that in my previous articles. My main mistake was an attempt to assess the company’s fundamental figures out of touch with the owner himself. The latest events around the split cast light on Elon Musk’s plans. Now his moves don’t look like a charismatic billionaire’s awkward jokes. They are rather a considered strategy of a clever man. Musk’s genius isn’t about engineering, it’s about social sciences. He managed to link his personal brand to the Tesla company. According to Robintrack, Tesla is the 8th popular company among the Robinhood users.

Robinhood is the biggest stock exchange for private investors that counts more than 10 million users. It is believed that Tesla’s stock managed to soar during the pandemic and economic crisis because of its army of fanboy investors.

The chart above shows that the company’s cost grew 6 times from March to September. One of the biggest spikes was in the period from 12th August till 1st September. The stock’s price grew twice in less than one month! Let me remind you that Tesla’s split was announced exactly on 12th August. Accidentally, another event occurred before that announcement. On 10th August, Robinhood closed access to the information on its users’ portfolio composition. Obviously, the main goal of the company stock split was making it more accessible for private investors. Stock exchanges normally don’t allow investors to buy a share’s fraction. Since Tesla’s share price exceeded the level of 1,500 USD in summer, small investors simply couldn’t afford to buy Tesla.

However, the Apple Company’s 4:1 stock split prompted a solution.

The positive effect of Apple’s and Tesla’s splits on the stock price is shown in the chart above. Even if Apple’s stock reached the price of 130 USD, which is convenient to small investors, Tesla’s positive effect was two times bigger. The Tesla stock grew 84% on the split announcement before a split itself. Neither the company’s low profitability, nor its stock overboughtness or high price could prevent the stock from growing. It indicates a big number of speculators in Tesla, which can be much bigger than in Apple.

I don’t think Apple and Tesla conspired to split their stocks at almost the same time. Elon was asked about an eventual split on Twitter already on 30th June, and he replied it was “worth discussing at annual shareholders meeting”. The nearest meeting wasn’t scheduled before 22nd September, though. So, the stock split decision was a total surprise on 12th August.

LiteForex: Tesla forecast: Fundamental and technical analysis

Most probably, Elon had used Apple as a lightning rod. Having learnt about its plans, he decided not to miss out on the opportunity to pump up the stock price further. If he had taken such a decision at any other moment, he would have been accused of pumping the bubble. However, Musk’s actions don’t look so suspicious against Apple’s background. He’s simply following the marker leader. Interestingly, the split date in the two cases was the same – 31st August.

LiteForex: Tesla forecast: Fundamental and technical analysis

Traders’ secret law says, “buy the rumour, sell the news”.

Obviously, the stock price will go down after the split. That was the main reason for Tesla stock’s fall, and not its not making it into the S&P 500. The shareholders simply wanted to fix profits by selling out the stocks, overheated on expectations.

The pool of Tesla biggest shareholders is headed by Elon Musk himself with a share of more than 18%. Apple’s stock became the most capitalized one in the US market after the split, but Elon failed to hide behind its fall. The chart above shows that Apple’s share price started falling on the same day with a 6-hour delay.

However, the mass media found another reason for the Tesla stock’s decline. They all started talking about the exclusion from the S&P500. Objectively, the news on Tesla’s possible inclusion in the index wasn’t spread as much as the news on the stock split. Many experts were sceptical about the inclusion because of the issues related to the company’s financial reports. Thus, the exclusion wasn’t supposed to affect the stock price, as those expectations weren’t inflated. So, in my opinion, Tesla’s stock fell once big players sold their shares and fixed profits amidst unprecedented growth.

Elon Musk’s idea is heating demand for the company’s stock for as long as possible using unexpected tweets and bright public shows.

It’s a harvest-time now. After the split, Tesla’s stock doesn’t look so expensive, and hamsters will eagerly buy out cheap shares. If Robinhood hadn’t concealed the information on its clients’ investment interests, a growing demand for the stock combined with a price fall would be obvious. Robinhood itself explains its decision to hide this information with the intention to lower its clients’ speculative sentiment. The company representatives say they don’t know how Robintrack’s information will influence the investors, and they don’t want to expose them to additional risks. This statement doesn’t sound convincing as there are many independent analytics providers on the Internet. For example LiteForex, which publishes expert opinions, like the one you’re reading now, and provides access to technical analysis and data on the market sentiment.

LiteForex: Tesla forecast: Fundamental and technical analysis

There are screenshots from LiteForex’s analytical blog above. They show market sentiment and indicators’ recommendations for Tesla. This is open access information available to anyone without registration. Actually, every big respectable broker provides its clients with such analytical data. Robinhood itself provides a simplified version of this service, which by the way makes the Robin administration’s actions even more so absurd. Any trader will always find necessary information on the Internet if he or she needs to make a trading decision. I think the closure of the transparent analytical resource at Robintrack is nothing more but an attempt to conceal the situation where whales unload expensive Tesla shares on unprotected amateur investors.

LiteForex: Tesla forecast: Fundamental and technical analysis

The horizontal volume chart confirms that situation on the 15-minute time frame. There are no panic sales. Large quantities of stocks are unloaded within a short time (marked with red arrows). The green circle marks the core participants’ behaviour. They bought out those unloadings and then sold them step by step. It happened on 1st and 2nd September. Then the market started slightly falling, and the panic developed. The manipulators’ reaction is classic: now they’re buying out the panic sale. I marked that with green arrows. The big players are getting ready to upload new large stock volumes, prevent panics and give hope for a retracement.

Conclusion

Tesla’s cap exceeds the aggregate capitalisation of Toyota, Ford and Renault–Nissan–Mitsubishi. At the same time, Tesla’s production share is only 0.5%, while the aggregate one of Toyota, Ford and Renault–Nissan–Mitsubishi is about 50%. Obviously, Tesla’s stock price is overvalued due to Elon Musk’s tactics. This man’s genius lies in the ability of calculating his steps in the long term, and not in his engineering skills. He understands well that Tesla can’t compare with the world’s giants. The green car wave has already begun, and the Tesla company rendered great services to its faster development tempo. Still, in spite of Tesla’s enormous growth, it can’t compete with the whole world. Elon Musk found a smart way of skimming the cream off his position in the market of electric cars: he raised the stock price sky high. Thus, Musk can use the stock as a bank margin for drawing in money and make cash fast through direct market sales. Musk’s popularity helps him to attract the best engineers and programmers into his projects who are ready to work for less money and for the sake of the beautiful idea. In the long term, Elon Musk acts wisely, making the most of the unprofitable company and expanding business against the background of big and inflexible auto-giants. Musk’s main task was “booking” a place in the sun for Tesla, and he did that well. The growing competition among electric car producers, the scientific progress and economic crisis will do their work, and Tesla will take a back seat. We are probably observing the price peak that will never be reached again. Tesla is on the threshold of a big bearish correction. Technical analysis will help us understand how deep it will be and if the price will recover.

Technical analysis

LiteForex: Tesla forecast: Fundamental and technical analysis

A technically perfect 5-wave structure catches the eye on the weekly time frame.

LiteForex: Tesla forecast: Fundamental and technical analysis

In the chart above, there is a beautiful closure of the fifth wave, near 0.618 fibonacci of the third level. The peak touched the level of 0.786.

LiteForex: Tesla forecast: Fundamental and technical analysis

On a smaller time frame, there aren’t enough confirming signals for the fifth wave’s structure to be considered as complete. The chart above shows that:

  1. MACD isn’t pointing to a bearish divergence (marked with the red line on top of the chart). If it were there, the five-wave impulse’s completion would be confirmed.
  2. A hidden bullish divergence, marked with the red line below the chart, indicates the bullish sentiment’s strength and an eventual pullback.
  3. The high level of volumes doesn’t allow us to suggest the bullish trend’s completion either.

Thus, we can see strong support at the current levels. It points to a flat correction. This kind of a correction doesn’t often form at the end of a five-wave impulse. So, most likely, the current wave is just a part of a big cycle with a long third wave, and not the final element of a big five-wave cycle.

LiteForex: Tesla forecast: Fundamental and technical analysis

So presumably, the correction we are observing at the moment is likely to be the fourth wave that will close up in the form of a triangle. The chart above displays this price pattern. We see a strong bullish trend that has been developing since March 2020. It must support bulls on the one hand, and attract bears on the other hand. Given the strong support, we may suppose that the correction may be consolidating up to the end of November. Since the third wave of that wave pattern is long, the fifth wave is likely to be the shortest, or at least not to go beyond the first wave.

So, the fifth wave may start developing after a false trend breakout. Its ascending movement will be weak. A diagonal triangle or a growing wedge may form too. These patterns are normally associated with lower trade volumes and MACD divergences. It will be a good signal about a fully-featured correction’s start.

Long-term plan for 2020-2021

If we take the above wave pattern as a basis, it will be hard to say for sure how the correction will develop after the five-wave impulse, because we don’t know how the fifth wave will end. So, considering Tesla’s exponential business development and the high demand for its production, I think an optimistic scenario will be appropriate

LiteForex: Tesla forecast: Fundamental and technical analysis

Following that scenario, we won’t see a deep drawdown: the future fourth wave’s projection zone will limit a fall. If my presumption is right and wave 4 will form as a triangle, the current stock price is located in the lower part of the pattern. So, it’s a perfect time for buying.

LiteForex: Tesla forecast: Fundamental and technical analysis

Every wave analyst will tell you not to trade in the fourth wave. However, if you’ve considered Tesla as a long-term investment tool, the current level is a good one.

The targets are clear:

  • The profit taking level should be near the historic high of 500 USD.
  • In an opposite scenario, long positions should be closed once the price breaks below the trend line and the bottom of the fourth wave of smaller degree.
  • The Profit/Risk ratio of 1.35 is very low.

As the risks are high, I would recommend this idea only to Musk’s true fans who are ready to hold unprofitable trades for a few months. The rest of investors had better look for more interesting investment assets.

Trading plan for September-October 2020

LiteForex: Tesla forecast: Fundamental and technical analysis

When it comes to the period of 1-2 months, the trading plan is similar to the previous one, but the targets are more modest:

Enter at the current levels at around 330 – 370 USD.

Long positions’ target: 450 USD.

If you aren’t ready to maintain a loss-making trade for a few weeks, close the long position when the local low of 329 USD is updated.

The P/R ratio is better here: it is close to 2.

This scenario’s confirming signals are:

  1. Panic sales, which are often followed by retracements. The semitransparent triangle built as Bollinger bands’ projection marks the bullish correction area in the chart above.
  2. Reaching of Pivot S1 level.
  3. Reaching of the third sub-wave’s peak.
  4. Reaching of the upper limit of weekly Bollinger Bands.

Trading plan for the nearest weeks

LiteForex: Tesla forecast: Fundamental and technical analysis

To find an entry point, pay attention to a smaller time frame. It concerns the trading plans above too. The chart above shows that:

  1. The target for the nearest weeks is near the Pivot indicator’s P level at 425 USD.
  2. The stock is in a bearish trend on the H1 time frame. There’s room for correction.
  3. The confirming signal for going long will be the micro-trend’s end and consolidation above the weekly Pivot level S1 at around 380 USD.
  4. If correction continues, average into the position at 300 USD. It is the weekly Pivot S3 level and the strong market activity channel.
  5. MFI and TD ROC oscillators are in the oversold area. It’s a confirming signal of the first corrective wave’s upcoming stop.

Final conclusion

Tesla’s stock is overbought: it looks overvalued even at the current level. This factor makes the nearest investment steps even more uncertain. The trading ideas above are based on my confidence in the private investor’s support and Elon Musk’s eventual intention to maintain the stock price as he’s the most important shareholder. The Iron Man’s support is a popular idea, so I believe choosing a soft correction scenario as the basic one is appropriate. However, we must be ready for increased volatility and stop orders’ triggering. I don’t recommend going short. Evaluate your risks wisely and don’t use big leverage.

In the multi-year term, I think fundamental bearish factors will prevent the stock from growing. It’s Elon Musk’s personal brand that forms the price. After the Space X IPO, the Iron Man’s fans will have an investment choice. Most likely, the private investors’ money will flow from the “poor dog” to the “new star”.

Take care of your money!

Subscribe to my blog at LiteForex and keep in touch!

Good luck and profits, everyone!

Yours,

Michael @Hypov

P.S. Did you like my article? Share it in social networks: it will be the best “thank you” 🙂

Ask me questions and comment below. I’ll be glad to answer your questions and give necessary explanations.

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Price chart of TSLA in real time mode

The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteForex. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.

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