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Tesla Breaking Down

April 26, 2019

Tesla ($TSLA) has been getting even more attention than usual lately. Shares are down nearly 30% YTD and this week, price broke a key support level. There are a lot of strong opinions about Tesla out there, but most technicians agree that it would be best to avoid the stock at this point and some even suggest shorting it.

As you can see from the chart above, price recently broke below support around $240-$250. This has been an important level in the past. It had previously acted as resistance until price broke out in 2017. In line with the principle of polarity, the same level acted as support when revisited twice in 2018, but it seems the 3rd time's the charm as buyers were unable to defend the level this week.

Dan Russo is Chief Market Strategist at Chaikin Analytics. In the Tweet below, he emphasizes the fact that Tesla has broken support and adds that the stock has a "Very Bearish Rating" on the Chaikin Power Gauge. This is a proprietary model that combines  20 of the most important factors affecting the stocks price and boils it down into one easy-to-understand rating. When we asked Dan what this rating means for shares of Tesla he had this to say:

"It means that the stock is likely to underperform the market for the next three to six months and gives bearish investors an increased level of conviction should they choose to trade the break through support"

Josh Brown of Ritholtz Wealth Mangement wrote this piece on his Reformed Broker blog today. He discussed the fact that Tesla is beginning to look more attractive on the short side even though its already fallen significantly. He detailed why price breaking down from this level is so significant.

"If you believe that price has memory and that investors anchor to prices to that had previously served as turning points for a stock, then Tesla’s failure to bounce from 250 is noteworthy."

Below is the chart he included to illustrate his point.

Brian Shannon is another respected CMT who has been stalking the break down in Tesla. Brian is known for using an indicator known as the anchored VWAP, a tool that takes a volume-weighted average of prices from a specific point in time. Below is a chart he shared on Twitter outlining the levels he's watching.

We reached out to Brian to tell us more about the AVWAP and how he's using it to anticipate how Tesla will move. Here's what he said:

The VWAP from the IPO in TSLA (blue line) shows us the average price the stock has traded at since first coming public in 2010.  Since 2013, TSLA has only been below that level for a few days during the 2016 decline.

The current decline looks like it will bring us another test of that average price.  The average price TSLA shares have transacted business at is ~225.  For years, the buyers have been able to feel good about their average price.

This VWAP is a potential source of demand for the stock again.  If it bounces, rallies should not be trusted.  Once the VWAP starts to have a negative slope to it, it will indicate the average long is losing money and the average short is making money.   This is likely to cause a shift in long term sentiment which could be big trouble for the longs!

In case you needed more evidence for the bearish case, here's a tweet from Morgan Creek Capital Founder, Mark Yusko. He points out that Tesla has fallen below its 200-day moving average, and notes "Nothing good happens below the 200DMA" 

Regardless of your thoughts on Elon Musk or Tesla as a company, there are ample reasons to avoid this stock right now. Don't forget that there are literally thousands of other stocks to trade in this market. We'll continue to watch Tesla and be sure to report back on any major developments. In the meantime, feel free to contact us with any questions.