I'm sure most of you are familiar with the Tulip mania in the 1600's. This is probably the most frequently mentioned anecdote when the discussion of bubbles comes up. I won't repeat how the story goes but there are a lot of entertaining tales I have heard discussing what actually caused the tulip bubble to burst.
Although quite entertaining, I'm sure few have much historical accuracy. Regardless, my favorite story of the bursting tulip bubble is about a hungry sailor working on a boat transporting some tulip bulbs. After some time at sea being cooped up with all the other sailors and hard at work, this particular sailor worked up quite an appetite. The story goes that a delicious snack soon appeared to this sailor. He believed the snack was an onion. However, it was actually a tulip bulb that was going to be sold for more money than he would probably see in his lifetime. Some onlookers by the dock saw him bite into the onion/tulip. That is when they realized that the tulip was just a flower and not something worth their entire fortune. At that moment, the bubble began to burst.
When I saw the images of the Tesla (NASDAQ:TSLA) on fire outside Seattle in early October (the first fire), my initial thought was of the sailor biting into the "onion". I'm not comparing Model S's to tulip bulbs. I'm not even trying to say Tesla's stock is in a "bubble". All I'm saying is that this image made you realize that Tesla is a car company and will not be immune to the challenges other car companies face. Tesla's accomplishments to this point have been nothing short of amazing. However, setbacks are bound to happen. There might be more bad press or even a recall in the future. It's simply the nature of the business.
Regardless of how you feel about Tesla the company (I personally think the company and Model S are absolutely fantastic), the stock may be a different story right now. I believe that there is often (not always) a big difference between a "good" company and a "good" stock. Also, it is extremely difficult for me (and almost all individual investors) to perform a comprehensive analysis on a company to determine if an investment should be made. Tesla is a great example of what the results of all the effort of "valuing" the company might be. Take a look at the analyst price targets out there. Currently, the analyst price target estimates for Tesla range from $45 to $230 (http://finance.yahoo.com/q/ao?s=TSLA+Analyst+Opinion). Wow! These analysts spend countless time and effort analyzing all available data, crunching the numbers, and using an assortment of very logical and well-thought assumptions. I'm pretty sure all of these analysts are quite smart as well. Some brilliant I would bet and all way smarter than me without a doubt. Now, how is it possible for an individual investor (like myself, who has a full-time job) to look at the same data and come to some kind of reasonable conclusion about what the stock is worth? It's not. Luckily for me, it doesn't matter. I think the market knows best so I focus what limited time I have trying to listen to what the market is telling me.
One of the comments technical analysis critics often make is that using price charts and other technical tools is like driving while looking in the rearview mirror. I do see a point to this comment. However, aren't rearview mirrors important when driving? As a matter of fact what is the first thing you remember your driving instructor telling you to do before even starting the engine of the car? Check your mirrors! Let's take a quick look at a couple of Tesla's charts to see what they have told us recently:
This first chart shows how Tesla's momentum started to fade long before the first fire and their most recent earnings report (which I actually thought was pretty positive for the company). In this weekly chart, you can see the momentum really starting to turn down beginning in July. This continued and became more apparent in mid-August (see point A). The price is making higher highs, but momentum is clearly diverging. This was no reason for me to sell but it was something to keep an eye on.
Now, let's take a look at the daily chart below. As you can see, a strong uptrend that was in place since May broke on October 3 (see point A). Not coincidentally, this is the day the news of the first Tesla fire was really beginning to circulate. It retested this trend line with no success over the next week. This was my cue to get out of the majority of my long position. Admittedly, this was hard as I had held some of this position since late 2010 and as I previously stated, I am a big fan of the company. I actually have a running joke with my wife. Almost every time we scan the DVR to decide what to watch, I suggest "Bloomberg Risk Takers", profiling Elon Musk. (Pretty funny for an accountant, I know.) Anyway, although my heart was still in the position, my head and more importantly, the price, told me it was time to let some go. So I did, although I didn't part with my entire position.
Tesla seemed to be finding some support in the $170 area after the major trend broke (see support/resistance line above). However, this was short lived as it broke below this point on October 23. It briefly broke back above, then after the release of Tesla's earnings, the price again went below this level (see point B). This was a major break which I believe will provide significant resistance going forward if and when the price returns to this level. Shortly after the earnings release I sold some more of my remaining position. I currently hold only about 10% of my initial position.
Let's take a look at where we are now. It looks like the stock has found some support in the $135 area based on the Fibonacci 38.2% retracement which also corresponds with the previous support / resistance levels shown below. This might be a good limited risk entry point. However, I'm not sure how much upside there is to the trade right now.
Again, I love Tesla and the Model S. I dream to someday own one (I'm holding out for the Model E as it's going to be closer to my price range) and I think the future for electric cars is bright. If you have been lucky enough to test drive a Model S, you can surely appreciate the awesomeness of this car. Have you ever thought about comparing a gas powered golf cart to an electric one? There is no doubt the electric cart is favored due to its smoothness, quietness, and instant acceleration. I think a similar point can be made when comparing a traditional ICE vehicle to an electric vehicle. However, as far as Tesla's stock goes, I think the sailor took a bite out of the onion in early October.
So where do we go from here? That's a good question. I wish I had a crystal ball to predict the future, make mountains of money, and buy a Model S. There is no crystal ball. However, we do have mirrors!
Disclosure: I am long TSLA.