Michael Clark's  Instablog

IS TESLA READY TO CLIMB?

In April we initiated a short-position in Tesla, TSLA. See the chart below, and look specifically at the bottom pane of the chart, the red line, T11 SunMarry. The turning-down of this indicator is bearish.

We have watched the stock decline from 38 to 27. I wrote that I expected it to go lower.

TSLA released terrible earnings a week or so ago; but announced that deliveries of its new model electric car would be made a month earlier than expected. Buying rushed into the stock, pushing TSLA up to 34 from 29. Then it turned back down.

Our trading trigger, T11 SunMarry, did not budge. The stock continued to decline, closing a gap on the downside. However it jumped again three days ago, turning our indicator (T11 SunMarry) positive -- this would ordinarily trigger a closing of the short position.

Why did we hesitate closing this short position? We have several reasons. Looking at the TSLA stock chart, top pane, find the black line (M5): M5 is continuing to make lower lows and lower highs, a bearish sequencing. CGTS Naked (red line, top pane) seems to be topping, and topping at a very low level. With a lot of buying it soars to 100 maximum. The recent rally carried the CGTS to 41.9 and now is trying to turn. This indicates a lack of committed buyers.

The biggest problem we see with TSLA, in the stock chart, is the continuing trend pattern of lower lows and lower highs. Look at the second pane. The blue trend line -- short-term trend -- is still quite negative: resistance at 29.519; support at 27.56. If TSLA were to take out the 29.519 resistance now, this would be a BUY SIGNAL. If TSLA were to hold above support at 27.56 and turn back up: this would be a BUY SIGNAL. However, if TSLA were to take out support on its next decline -- something we think likely -- then this would be a continuing SHORTSELL SIGNAL.

What will TSLA do?

We know TSLA has loyal supporters. Buyers seem to rush in regularly to support this stock. Macro questions should influence the result of this battle between buyers and sellers at this very key moment in the life of this short-sell position for us.

What are the general market conditions? We know we have had a LOT of selling -- is the selling overdone? Let's look at VXX, the VIX Volatility Index ETF, to get a sense of where the market is going.

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VXX has been in a long-term downtrend for some time -- and stocks have been rallying. Now however, the VXX seems to be healthy. The black line in the first pane shows a long-term turnaround happening. See the black trendlines that show this uptrend.

The CGTS Naked (red line, top pane) seems to be trying to bottom, after a very weak pullback.

Our T11 Sunmarry (red line, bottom pane) is pulling back, indicating the sellers are taking control. But the trends in the middle pane show with both higher support and higher resistance -- things TSLA does not have.

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Why are stocks retreating? My premise is that stocks are going down because the US Dollar is becoming stronger. Ben Bernanke's plan all along was to use QE and 'Operation Twist' 1) to re-capitalize banks by siphoning them free or cheap tax-payer money under a new name (not 'bailout') AND 2) to re-inflate global markets by sinking the US Dollar. As the Dollar weakens, the commodities and assets traded in dollars inflates. It worked for Ben in 2009 -- and his goal was to use the Anti-Dollar play to re-inflate the global economy, and to re-inflate US housing prices to save the banks from their trillions of dollars in eposure to derivative obligations that are now hidden off the books.

What Ben did not see was the collapse of the Euro, which has given new life to the Dollar. As the Dollar rises, commodities collapse, stocks collapse. Stocks don't always (historically) collapse when the US Dollar is strong. That is the dynamic now however. Commodities always collapse when the dollar is strong. And QE, which sought to crucify the Dollar, did lead to inflation of the commodities bubble for a time -- which gave China the appearance of a potential savior of the global economy. However, now the Dollar is strong; China is weak; Europe is disintegrating, along with the Euro.

More QE will not, however, support the Euro as an alternative to the Dollar. More QE might reignite a commodities bubble, which infuriated developing worlds and led to inflation problems with food prices and materials prices which led to global political consequences in the Middle East and in Asia. Many Fed officers are now speaking out against QE for they understand that its mechanism if only to blow bubbles, not help to grow the economy.

Bubbles are what sank the global economy.

The UUP chart below (bullish US Dollar) is bullish. There is a sign her of an overbought condition; but no signs of a top. CGTS (red line top pane) shows a bottoming at very high levels which generally means the rally is not done.

UUP smashed through trend resistance at 22.34; so that level now becomes support for UUP.

This all indicates to me that the selling in the markets is not done. Markets ARE oversold. But markets can remain oversold (or overbought) for a very long time. Trend momentum matters more than overbought/oversold momentum. Because of this we will wait on covering our TSLA short to see if TSLA can break up through resistance or breaks down through support.

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MICHAEL J CLARK

CGTS - Hanoi, Vietnam

Disclosure: I am short TSLA.