NEW YORK (TheStreet) -- Yes, Tesla (TSLA - Get Report) makes cool cars, but an exciting product doesn't always translate into an ever-rising stock price. So let's forget about the cars for a second and engage in some objective technical analysis of this stock's behavior so far and what history shows is likely to happen in the future. If we do that, we see clearly that Tesla shares are headed lower.
In late June, the decision support engine flashed a red alert that Tesla stock had reached unsustainable, overbought conditions near $265 and that a decline was imminent. The article describing that alert showed how the last few corrections in this stock had averaged 34%, meaning that if coming correction was similar, Tesla's price would fall toward $176.
Now let's review five things you must know about Tesla stock and how they relate to our current prediction.
The first is that Tesla's share price has nothing to do with the Model X's pricing, and it has nothing to do with Morgan Stanley's lowering on Tuesday of its price target on Tesla to $450 from $465. (That target is more than 200 points higher than the stock's recent levels!)
Crowd sentiment controls a stock's price, and the love affair the herd has had with this stock is in need of a relief period after it reached mania levels into the 2014 price peak. What followed this summer's overbought warning from the decision support engine was choppy action for the following few weeks into the late July peak near $286 (a lower high than the September 2014 peak), then a reversal into the August low near $195. Some analysts pointed to the immediate rebound back above $200 as evidence that new highs were in Tesla's near future. Although the decline from the July high to the August low (31%) approached the average 34% selloff of the past few cycles, the decision support engine strongly suggests the lows of the corrective pattern are not yet in place.
The second thing to know about Tesla is that the weekly stochastics have rolled back down (aligning with the falling, monthly stochastics), as this updated chart shows. This condition informs the decision support that the path of least resistance is lower.
Third, history shows that the best time to be establishing or adding to long exposure is when these stochastics are in the oversold green boxes that surround the 10% threshold, which is not currently the case, nor will it be for several months. The decision support engine warns that in this scenario, buying actions are not indicated; in fact, selling actions are.
Fourth, the pattern since early 2014's rise above the 2013 peak (near $197) until now is a large rounding top, perhaps a double top with September 2014, which has measurements to the lower levels of the green box, where the November of 2013 low found support. This would satisfy several Fibonacci and Elliott Wave guidelines for corrective declines that follow parabolic rallies, which Tesla experienced from its IPO in 2010 through late 2014.
Fifth, history shows, almost without exception, that parabolic rises end with crashing declines that typically return prices to the origin of the parabola. While it's currently impossible to imagine, if Tesla shares returned to the origin of their parabola, they'd go to the $35 +/-$5 zone.
Remember that nobody could fathom Google's (GOOGL - Get Report) 2007 peak near $375 would lead to a crash to $125 (66% lower in 16 months), or that Alibaba's (BABA - Get Report) peak last year near $120 would lead to a crash to last month's $57 (52.5% in 10 months).
The decision support engine warns that at the least, the risk toward the lower end of the green box should be considered, and protected from.
Therefore, DSE suggests using protective sell stops to protect long exposure at $231 (the 200-day moving average) as a worst-case option, and $235 if you can be that assertive. If you're flat, you can establish short positions at these same levels, and if you're already short, you can maintain those positions or add to them at those levels.
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