Sentiment has changed on the electric carmaker, but things could shift fast.
Where next for electric vehicle maker Tesla (NASDAQ:TSLA)?
I last covered Tesla in my column of 22 February, which maintained my bearish stance when the shares were standing at the $720 (£509.51) mark. They had made an all-time high at $900 on 26 January, which I believed would hold for a very long time.
The shares are currently trading at the $580 region for a loss of 35% off the all-time high. I have been suggesting taking profits since January.
Interestingly, since February more adverse news about the cars has emerged, including collision fatalities when in auto-pilot mode. This follows the age-old principle of markets that when in a strong trend, the news – 'good' or 'bad' - becomes favourable to that trend – or at least the common interpretation of the news.
In a bear trend, 'bad' news augments that trend. But when in a bull market, 'bad' news puts hardly a dent in that trend. This explains why we often see perverse reactions to certain news events that 'should' have sent markets the other way.
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It is not the news that drives markets, but the prevailing sentiment/mood. If only we had a mood-ometer to accurately measure it! Alas, we must infer it from other observations and it is a somewhat hit-and-miss affair.
But sometimes, sentiment extremes really do stand out – such as the near-universal positive mood towards Tesla a few months ago.
But now sentiment has taken a darker tone and fewer investors believe it will be the major electric vehicle player in the years ahead.
This is what I wrote in February: “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.”
Here is the updated daily chart:
Past performance is not a guide to future performance.
Immediately following my 22 February post, the shares embarked on a major move lower only to bottom at the chart support at the $580 mark on 5 March.
It then traced out a classic three-wave correction up to $780, but then topped out as bearish news from China emerged. That was wave 'b' of what should be an a-b-c pattern that should end around the $400 region, which is my original target area from January. That would represent a classic Fibonacci 2/3 correction to the entire bull run.
And since February, more competitive electric vehicles are being launched by the legacy manufacturers to take even more shine off Tesla – and a break of my pink chart support zone around $550 appears imminent.
Incidentally, the other leader of the current speculative mania I am using is bitcoin - and that is likewise down by over 50% off its all-time high. Is it a coincidence that both markets are heavily impacted by the tweets of a certain Mr Musk?
He seems able to move markets with a single tweet. If so, can a few well-judged tweets from him get both markets back where they were only weeks ago? Hmm.
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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