The short sellers hone in on Tesla

Tesla has come firmly onto the radar, and while the stock has already fallen 15.5% from the 26 June high, the selling now seems to be accelerating.

Market data
Source: Bloomberg

The buyers are standing aside (for now) and the short sellers are ramping up business, with the news flow taking a negative turn and this suggests an elevated risk Tesla tests uptrend support drawn from the December 2016 lows, which intersects at $319. Interestingly, we can see the price has closed through the May breakout at $326.95 and it does feel that buying is akin to catching the proverbial falling knife.

If looking at long positions, my preference would be to wait for the buyers to step in and at least put in a base in the four-hour chart before putting capital to work. It seems, however, that the path of least resistance is for lower levels and the bulls will want the uptrend to hold or we could see the 100-day moving average at $306 come into play. Perhaps even $300.

The analysts’ consensus 12-month price target on TSLA sits 7.3% lower at $303, although to be fair, the range of these targets are extremely wide. Berenberg, for example, believes TSLA is worth $464 based on their projections of future cash flows. Goldman Sachs takes a different view, stealing the headlines on Wednesday, with their projected six-month price target of $180, suggesting the stocks has 42% downside over the medium-term.

Their projection predicated on the 'Model 3 launch curve undershoots the company’s production targets and as 2H17 margins likely disappoint'. Goldman’s see auto gross 2H margins of approximately 16%, some eight percentage points below the Bloomberg complied consensus. This will likely garner intense focus as we head into Q2 earnings, when TSLA report on 26th July.

The bears are focused on vehicle deliveries, which grew at 22,000 in Q2, a fall of 12.2% from Q1 and there is a concern about these numbers going forward. Elon Musk has set some lofty production targets and the market is certainly sceptical of TSLA meeting them.

There is also a view that because the company is so capital intensive and churns through cash, that it is just a matter of time before we see TSLA tap its shareholders for more capital. Of course, there is a risk that the company do turn cash flow positive in 2018 and into 2019 - this would give them increased options.

Another red flag for the short sellers was Volvo making the interesting announcement that it intends to phase out gasoline and diesel cars in 2019. So many are pointing to headlines that Tesla now have competition.

Tesla is an interesting opportunity, especially ahead of Q2 earnings and certainly given implied volatility is ramping up to the highest levels since July 2016 and the five-day ATR (Average True Range) is at the highest since February 2016. Given these variables position sizing should be kept to a minimal and stops need to be pulled wider from entry. However, in terms of near-term direction, it still suggests to me that there is a greater probability of lower levels being seen.

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