Chart of the week: is it time to take profits in Tesla?

by John Burford from interactive investor |

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The electric vehicle maker’s stock market boom could be stalling, while rivals circle.

When I last covered Tesla (NASDAQ:TSLA) on 2 November, I suggested that the stupendous advance in 2010 – a ten-fold explosion in the share price – was stalling and could be getting to the end of its amazing run. And, since then, the chart behaviour has not dissuaded me from that notion. Far from it – it has augmented my bearish argument.

From the lowly depths under the $100 (£71.23) mark a year ago last January, the advance has been relentless. But even a cursory glance at the chart reveals a clear five-wave pattern to the January high at the round-number $900 print.

Source: interactive investor. Past performance is not a guide to future performance.

According to the Elliott Wave theory a five-wave pattern, when complete, leads to a move in the opposite direction. The difficulty in forecasting the future path of prices is deciding when the final fifth wave has terminated. This can be a very tricky affair – but there are some clues that can be employed.

For instance, does the final fifth wave sub-divide itself into five clear sub-waves? And if there is a momentum divergence leading to the high, it suggests the buying power is waning and the selling pressure is taking over (at least temporarily).

If those conditions are present, then I can gain some confidence in calling the top.

Here is the six-week congestion/reversal pattern on the daily chart. First, I have a clear five-wave subdivision in wave five, together with a momentum divergence into the $900 all-time high. So far, so good.

Source: interactive investor. Past performance is not a guide to future performance.

A note about electric vehicles, or ‘EVs’. The extreme power outage in Texas last week was the result of the freeze-up of the wind turbines that account for 23% of the energy output of that state. With no power available to re-charge batteries, EVs were grounded. Vehicles running on petrol and diesel suffered no such handicap.

Although EVs may be a joy to drive, range anxiety – and now blackouts - remains a real concern. Teslas image has not been enhanced by the Texas blackouts affair. Not only that, but Tesla cars are among the most complained-about marque on the road for defects and faults.

With the legacy manufacturers hot on their heels, how much longer can Tesla maintain its current lead?

Prudence suggests taking at least some profits in Tesla, as I suggested in November.

John Burford is the author of the definitive text on his trading method, Tramline Trading. He is also a freelance contributor and not a direct employee of interactive investor.

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