Tesla (NASDAQ:TSLA) finally made an a new all-time high this week. Despite all the holes the bears found in the fundamentals, it was the one thing I was fairly certain of.
As I argued back in August, fundamentals are not driving price in this stage of the cycle. In this last phase of the rally, the primary drivers are sentiment and positioning.
Sentiment inspired the Mad Hedge Fund Trader to write an article about ‘How Tesla Is Taking Over The World’. He expects a 400% rise, but doesn’t mention anything about the balance sheet, the debt, and the already high market cap. These are minor inconveniences that can be ignored when a stock is going up.
Positioning plays a massive part too. In my last article, I pointed out the percentage of float short was high. Understandably, Tesla attracts a lot of bears and a lot of shorts, but while price was below the old highs, they were asking for trouble. As I concluded,
Tesla is hovering just below the all-time high. I don’t think it will let shorts off easily and just reverse here. Based on previous rallies, the target is $308, but there is likely to be a pullback and consolidation first.
Monday’s volume was 13.9M shares, the second highest since last June. This liquidity was the goal for the institutions, and while they had this target, longs still made sense. Now it’s ‘job done’, the odds could be shifting in favor of the shorts.
I’m not saying fundamentals don’t matter. In the long term, they clearly do, but using a fundamental argument to short Tesla in the last few months is like putting a square peg in a round hole.
Sentiment is best tracked through technical analysis as it reveals what participants are doing rather than what we think they should be doing. It can also reveal less obvious insights.
Here is the weekly break out in all its bullish glory. Nothing but blue sky ahead:
This kind of break out gets people excited and buying again at the worst possible prices. But what kind of trader buys here?
Actually, this was answered by one of my critics in the comments section of my last article when I closed a quick trade before earnings,
Technical traders trying to scalp the last 5% off the top, should give you a general idea of what kind of “investors” are still in Tesla.
He was absolutely correct; I am not what you’d call ‘strong hands’.
The only reason to buy here is because price is going higher and it has a reasonable chance to continue. Traders like me are ready to jump at the slightest sign of trouble.
This means if there is some sort of failure in the next week or so, and price reverses back below $285, there will be a rush for the exits. The target from my last article was $308 based on equality with the February to April 2016 rally and I will be watching the price action in this area very closely.
The longer term view of the cycles (from my article last August) reveals a 5 wave rally in progress since the IPO:
This is a very basic Elliott Wave pattern. For those unfamiliar with this method, here is a link, but all you really need to know is wave 5 is the last phase in this entire rally.
Here is how alphaking.com describe the context for wave 5:
Once the selling pressure of the Wave 4 correction subsides then a blow-off speculative Wave 5 impulse move begins. This is the territory of the novice, and the investor who trades on emotion. Unlike the solid advance of Wave 3 – the reality wave – Wave 5 advances are carried on a wave of speculative greed with the desire to get-rich-quick spurring on the momentum players, who often feel they cannot lose with this stock since it is seemingly acting so well. They scoff at the cautious words of the veteran trader who warns of excessive valuations. “It’s different this time, old timer,” is their mantra.
Sounds about right to me. Once wave 5 is complete, there will be a large correction of the entire rally. The S&P 500 (NYSEARCA:SPY) is in a very similar situation as it is finishing off a 5 wave rally from the 2009 lows in a rather optimistic way. For now, the fundamentals don’t seem to matter much anywhere and the bulls are laughing at the bears. Not for long.
The rallies since the 2016 lows can be broken into their own phases or waves.
So far, there are only 3 waves and the expectation is for 5. Shorts can target $220ish, but there is the possibility of one more rally.
Targets depend on your time frame. A medium-term short from $308 to $220 is my trade. Long-term shorts may wish to hold – there is a chance price drops right through $220 and the top is in, but there is about an equal chance it turns and makes one more high first.
Tesla has broken to a new all-time high. While many will view this as bullish, I always saw it as a requirement to flip bearish. New highs will stop out some shorts and draw in weak hands at bad prices. Sentiment is now excessively bullish and longs are doing victory laps. These conditions may at last favor the shorts.
Disclosure: I/we have no positions in any stocks mentioned, but may initiate a short position in TSLA over the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.