November 6, 2013

Why Tesla Motors might fall like a failed rocket

This will be a fast analysis of Tesla Motors ($TSLA). I'm a big fan of the company - I even wrote a book about the founder Elon Musk called The Engineer. But there will always be a difference between the company and the stock. So this will be a fast analysis from a technical point of view - not a fundamental. 

Tesla Motors was founded in 2003 and became a public company in June 2010. Since then, the stock has increased with more than 800 percent and the latest move can from a technical point of view be described as parabolic. These parabolic curves are often found when a bubble is forming and the famous trader Paul Tudor Jones used a similar curve when he predicted the October 1987 crash.

Parabolic curve. Source: Chartpattern

Here's the chart of Tesla Motors since 2010:

Tesla Motors stock chart. Source: Yahoo

The problem with these parabolic movements is that the fall tends to be fast if the stock price breaks one of the base lines. This is probably why the Tesla Stock is currently down with 15 percent. As the price breaks through the base lines, the rule says that the price will fall to the next base line. It's also common that the fall ends at the moving average of the last 200 days, which is currently at 100 according to the chart above. But remember that this is no exact science, more of a rule of thumb.