Tesla (NASDAQ:TSLA) shares dropped on Monday, to $966.41, closing down 5% on the day. That move didn't just take the stock below the psychological, round $1,000 level. It was also part of a more significant price move for TSLA.
At the close, the stock had completed a 21.42% retracement from its Nov. 4 record of $1,230, putting it officially in a bear market.
The timing for one of the world's most notable and closely watched stocks to descend into a bear market is rather ironic. The move came just as Time magazine named Tesla's founder and CEO, Elon Musk, its Person of the Year. One could say traders bought into the rumor and sold on the news.
However, there's actually a more concrete reason for the selloff. News broke yesterday that Musk unloaded an additional $906.5 million worth of his shares of the company and exercised options to buy 2.1 million shares at a significantly lower strike price.
The increase in supply drove the price lower, as did investor sentiment, which doesn't like it when owners sell significant blocks of shares. However, from a technical standpoint, TSLA entering a bear market is simply an arbitrary benchmark. For them it's the patterns formed by the price action that tell a fuller story.
TSLA has completed a peak-and-trough downtrend. However, purists would wait for another pair of peaks and troughs to provide a descending series of highs and lows independent of the uptrend. The first peak of the chart we're showing cannibalizes the final height of the preceding uptrend.
Nevertheless, stricter technical analysts may be appeased by the Descending Triangle, accepting the bearish outlook after the price violated the 50 DMA, also completed yesterday. Finally, Tesla is still trading way above its 200 DMA.
The last time this happened, when it peaked in late January, the price then fell back to the long-term moving average. If that occurs once again, expect another 20% drop.
Trading Strategies
Conservative traders should wait for another pair of peaks and troughs before shorting the stock.
Moderate traders would wait for the price to successfully retest the triangle.
Aggressive traders could go short at will, provided they accept the higher risk proportionate to the higher reward of moving before the rest of the market. Money management is key. Here's an example showing the basic points of a coherent plan:
Trade Sample – Aggressive Short Position
- Entry: $975
- Stop-Loss: $1,000
- Risk: $25
- Target: $875
- Reward: $100
- Risk-Reward Ratio: 1:4