Sunday Edition: Tesla’s Price Has Fallen, But This Isn’t A Buying Opportunity Yet

July 30, 2017

Sunday Edition: Tesla’s Price Has Fallen, But This Isn’t A Buying Opportunity Yet

It’s finally here.

Friday night, Tesla (NASDAQ: TSLA) handed over the keys to the first 30 Model 3s.

This much-hyped foray into mass-market territory could prove to be a true game changer for the company when, and if, the Model 3 reaches profitability.

However, if you thought the Model 3 finally hitting the streets would send Tesla’s stock on a tear after a few weeks in a downtrend, well, I have some bad news for you as the technical picture says otherwise.

But before we jump into the technical side of things, let’s take a quick look at some of the catalysts that could push the stock’s price lower over the long term.

Tesla has had a rough month. Headline after headline has pushed the stock down, and today (Friday), the price is more than 15% lower than where it was a month ago.

Much of the bad news in the last month has been fairly innocuous—a crash in Minnesota that bystanders blamed on flaws in Tesla’s self-driving technology despite the driver in the crash claiming that the self-driving functionality wasn’t engaged at the time—and some has been self-inflicted, like the quote from Elon Musk where he said that the price of Tesla stock was “higher than we have any right to deserve.”

Headlines aside, the real pressing issues for Tesla revolve around consumer demand and government subsidies.

In 2015, electric vehicle (EV) sales declined across the nation. In Georgia in particular, where the state government eliminated its $5,000-per-vehicle subsidy that year, EV sales plunged from 3% of total car sales in the state to less than 0.5%.

In 2016, EV sales rebounded thanks largely to one state, California. California has been aggressive in offering subsidies for EVs as part of its effort to have 1.5 million zero-emission vehicles on the road by 2025. The state now offers a $5,000-per-vehicle subsidy, and has discussed raising the amount to $7,500, but it’s hard to imagine the state offering the generous subsidy indefinitely considering its massive budget deficit and the fact that all the EVs on California roads are eating into the state’s gasoline tax revenue.

If Georgia teaches us anything about what happens to Tesla’s sales after subsidies end, things won’t be pretty when the day comes that California ends its subsidy. For further evidence for what that might look like, we can look to Denmark and Hong Kong.

Denmark ended its tax break for EVs at the end of 2015 which caused Tesla’s sales to surge to an all-time high there that year. However, sales have been virtually non-existent since. In 2016, 1,300 EVs were sold in the country compared to Tesla delivering 1,300 vehicles in Denmark in December 2015 alone.

Now that EV sales in Denmark have all but grinded to a halt, the country has announced plans to walk back some of its changes to its tax incentives for EVs to try to spur sales again.

In March of this year, sales stalled for Tesla in Hong Kong as well after the government announced changes to the tax benefits that customers could get from buying EVs. The new policy capped the tax waiver available to first time buyers of EVs to HK$97,500, or $12,500. That may sound like a lot, but Teslas cost substantially more in China than they do in the U.S. because of shipping and export costs, and without the tax benefit, it now costs $118,400 for a Tesla Model S in Hong Kong compared to the $72,900 for the same vehicle before the new changes took effect on April 1.

With this change, not a single newly purchased Tesla model was registered in Hong Kong in April, and that’s compared to the 2,939 Tesla registrations there in March, and five times that number in February.

Unfortunately, what the cases in Denmark, Hong Kong, and Georgia show are that incentives play a hugely important role in EV sales, which is bad news for Tesla.

But the big issues of consumer demand and government subsidies aren’t the only big issues facing Tesla. There’s the fact that nearly every major car maker has announced plans for new EV models in the last year, which will majorly increase the pressure on Tesla. And that’s just one on a long list.

However, despite the big threats that are looming—and have really always loomed—over Tesla, the price of the company’s stock has continued to climb, no matter how irrationally. That was, until the last week of June:

Source: TradingView.

After a disappointing earnings report, Tesla shares dropped sharply. But before you think of this as a good buying opportunity, look at this:

Source: TradingView.

The pattern I’m seeing here is a flag pattern.

A flag is a continuation pattern that forms what looks like a pole and a rectangle, thus its name. The pole is formed by a sharp price movement, and the rectangle is formed by two parallel, and typically sloping trendlines that act as support and resistance.

Generally, the slope of the flag will move in the opposite direction of the initial sharp price movement, so in TSLA’s case, the initial price movement was down, and thus the slope of the flag is up.

Once the price breaks the support line of the flag, the trend will continue in the prior direction, which for TSLA means down.

For a minimum price movement, measure the distance of the sharp move of the initial movement and add it to the breakout point. For TSLA, that means we could see the price reaching the $260s, or nearly -30% from where the price is today.

Now in the long run, I think the cult of Elon Musk will prevail—and EVs taking over the car industry is all but inevitable and this company is positioned to benefit from that—and Tesla’s stock price will reach ever higher highs, but that won’t happen before this pattern completes and this correction is over, so hold off on buying for now.

By Kristina Keene Investiv Daily Sunday Edition Tesla Share: