Good Time to Take Tesla Profits

Tesla, Inc. (TSLA) stock may have failed a fifth attempt to break out above the June 2017 high near $390 and could now lose ground at a rapid pace, perhaps undercutting the $300 level. Traders and market timers who bought the bounce off support near $250 should consider taking profits and hitting the sidelines because prior declines starting near range resistance have unfolded quickly, often trapping overeager bulls.

Macro themes have moved the broad market for months now, with trade tensions and growing odds for a 2019 economic slowdown weighing on all sorts of cyclical plays. True believers won't admit it, but Tesla is also a cyclical play, despite its high-tech origins, with revenues and profits dependent upon a free-spending customer. Given the broad slowdown in U.S. auto sales this year, it's tough to argue that the company is immune to the next recession.

Tesla sold just 211 automobiles in China in October, down 70% year over year, warning that bearish sentiment toward American manufacturers could hurt overseas prospects badly in 2019 and beyond. Even a trade agreement might not help at this point because the ugly American label is likely to persist in the Asian nation for years to come. The European outlook isn't much better, with the overhang of U.S. tariff threats bleeding traditional good will.

A 2013 momentum rally stalled below $300 in March 2014, carving the first peak in a broad trading range with support near $175. It broke that level during a sell-off into January 2016, marking a climax and buying opportunity, ahead of a recovery wave that remounted broken support in March. The stock tested that level in November and turned sharply higher, returning to range resistance in February 2017.

An April breakout attracted widespread buying interest, lifting price above $380 in June 2017. The subsequent pullback found support near $300 a month later, generating a September rally that failed just two points above the prior high. That reversal marked the start of a more bearish phase, characterized by a series of lower lows into April 2018's deep low at $245. The stock tested range resistance once again in June and August, with sellers denying both breakout attempts.

Elon Musk's legal troubles contributed to a subsequent downturn that ended just four points above the April low in October. The Securities and Exchange Commission (SEC) settlement improved bearish sentiment, generating a vertical impulse that stalled just eight points below the August high earlier this month. The stock has lost more than 30 points in the past two weeks but is still trading above short-term support near $325. The weekly stochastics oscillator has crossed into a sell cycle during the latest downturn, predicting that relative weakness will continue into early 2019.

The on-balance volume (OBV) accumulation-distribution indicator topped out shortly after the September 2017 peak and lifted a few clicks above that level during the June 2018 breakout attempt. It fell to the lowest low since February 2016 during Musk's scandal, signaling a shareholder exodus, while weak accumulation during the recent uptick has made little progress off the deep low. In turn, this signals a major bearish divergence, predicting that inadequate sponsorship won't support a breakout.

Limp accumulation readings also predict that it will take months or longer for buying interest to gather the strength needed to clear resistance that has already repelled multiple breakout attempts in the past year and a half. In addition, it tells informed market players to "watch out below" because this structural weakness could dump the stock through $300 in a quick and dramatic failure that traps the latest batch of newly minted bulls.

Tesla stock has reversed at multi-year range resistance for the fifth time and could now sell off through psychological support at $300.

Disclosure: The author held no positions in the aforementioned securities at the time of publication.