Beware the Tesla Inc Stock Death Cross

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Regular readers know that I am long-term bullish on Tesla Inc (NASDAQ:TSLA). I like the fact that TSLA stock is leading the charge in alternative energy space, not only with its electric vehicles, but also with its solar panels and home storage batteries.

Tesla is an early mover in the alternative energy space, and it’s future is bright.

That said, TSLA stock is overvalued and has been for some time. The shares tend to ride lofty peaks and deep valleys based on the ebb and flow of investor sentiment, which is heavily fueled by the financial media and Tesla’s own CEO, Elon Musk. Musk is incredibly charismatic — a la Steve Jobs — and he has a habit of over promising when it comes to Tesla’s products … one look at Model 3 deliveries is all you need to know there.

Valuation concerns came to a head in the final quarter of 2017, and TSLA stock has fallen more than 22% since its September peak near $380. The shares eventually found support near $300, and TSLA spent all of November bouncing between $300 and mounting resistance near $320.

TSLA Stock
Click to EnlargeLooking at the chart, you can see that the TSLA stock price could be on the verge of taking another massive hit. The stock’s 50-day and 200-day moving averages are closing in on a bearish cross, one known among technical analysts as a “death cross.”

While some analysts believe that such a technical formation is just a result of a stock’s intermediate-term price action and can be largely ignored, others believe it is a sign of additional selling pressure that will send the stock sinking even further.

The problem is that TSLA stock is vulnerable right now. Tesla and a plethora of other alternative energy companies depend on certain U.S. tax breaks and incentives — and the Republican tax plan winding its way through Capitol Hill guts many of those breaks and incentives. While the bill isn’t likely to completely scuttle Tesla’s plans, it is sure to slow things down and eat into Tesla’s already tenuous bottom line.

With TSLA stock already trading in bear market territory below its 200-day moving average, the last thing the shares need is a “death cross” to further influence investor sentiment — especially since this overvalued stock thrives on positive sentiment.

Speaking of sentiment, there is a wealth of negativity flowing toward TSLA stock. For instance, Thomson/First Call reports that 15 of the 23 analysts following Tesla rate the shares a “hold” or worse, with an average consensus price target of $310.91 — a discount to Tesla’s current trading range.

Furthermore, short interest currently accounts for about 25% of TSLA stock’s total float after rising 7% during the most recent reporting period.

Lastly, TSLA options traders are also firmly on the bears’ side. Currently, the Jan 2018 put/call open interest ratio rests at 1.52, with puts easily outnumbering calls among back-month options.

What’s more, there is potential for a sizeable move heading into January 2018 expiration. January 2018 implieds are pricing in a move of about 9.5% for TSLA ahead of expiration.

This places the upper bound at $350 and the lower bound at $290. A rally to $350 seems unlikely barring a major development for Model 3 shipments. A break below $300 seems more likely, given the technical and sentiment backdrops, and it could result in a longer-term downtrend for TSLA stock.

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