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Chart of the Day: Is Tesla Following Meta and Crypto?

Published 11/17/2022, 07:53 AM
Updated 07/09/2023, 06:31 AM

We have witnessed, and some experienced, the bursting of a virtual reality bubble. The FTX saga is the tip of the iceberg for the virtual currency space. Before this drama, Bitcoin had already lost three-quarters of its value since November 2021. And Meta Platforms (NASDAQ:META) has lost a similar amount of its value over the same period as it builds its virtual reality offering.

So this led me to ask, how much of Tesla's (NASDAQ:TSLA) value is derived from good old-fashioned fundamentals, and how much is based on its charismatic leader? On Dec. 10, 2020, I wrote Time For Overvalued Tesla Shares To Come Down To Earth?." I explained:

"TV personality and host of Mad Money, Jim Cramer, argues that young investors believe in Elon Musk. Tesla's founder and CEO has been designated the new 'Steve Jobs' by these investors, who appear to be willing to buy TSLA shares at any price.

Young investors are also one of the main reasons for Tesla's massive rally since March. Indeed, Cramer has gone as far as saying that perhaps we should start taking advice from these young, largely amateur investors rather than from investment professionals."

Let's look at the correlation between TSLA and BTC

Tesla Vs. Bitcoin Monthly
One picture is worth a thousand words.

Here's another view.

Tesla Weekly
Tesla completed an 11-month-long H&S top, a classic reversal pattern. The implied target is measuring the structure's height and expecting a repeat move from breakout to $21.

Now, I'm not saying that's where the stock is going. That is how technicians have been setting targets based on a century of trading. The problem with a stock like Tesla's is that its reversal pattern is so disproportionately large relative to its historical price—like Bitcoin. When the cryptocurrency was trading under $43,000, I was ridiculed for suggesting that it's heading to $30,000, and if it breaks that level, it will keep plummeting to multiyear lows. I pointed out that the massive pattern implied a target below $0. At the time, institutions were getting into the space, and new-age asset and investment banking voices were talking about $100,000 and $1 million. I didn't know BTC would crash. I knew that that was the trading patterns' "implied target."

So, why is the price pattern large relative to the stock's price history? Because its gains were made at a disproportionately, possibly unsustainable, pace.

Tesla Daily
On Nov. 2, the price completed a pennant, bearish after the initial 29.1% plunge in two weeks. The implied target is an $84 decline from the $229 breakout, giving us $145.

On Wednesday, the stock completed a rising flag, like the pennant, bearish after the preceding $60 selloff in 7 sessions. Its implied target is a $60 repeat drop from the $191 breakout point to $131.

If these last two patterns follow through, they will break the falling channel, meaning the price will increase its rate of decline.

Trading Strategies - Short Entry Setups

Conservative traders should wait for the price to fall below the $177, Nov. 9 low, then throw back to demonstrate distribution and wait for at least three sessions, so the price doesn't climb back above the flag.

Moderate traders would short with a fall below $180 and at least a two day-filter to ensure it's not a bear trap. Then, they'd wait for a return move for a better entry, if not for confirmation.

Aggressive traders could short now.

Trade Sample - Aggressive Short

  • Entry: $185
  • Stop-Loss: $195
  • Risk: $10
  • Target: $135
  • Reward: $50
  • Risk-Reward Ratio: 1:5

Disclaimer: At the time of publication, the author had no positions in the securities mentioned.

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