A Field Guide to Manipulative Short-Selling Techniques
To possess a full picture of the investing landscape for this stock, you need to understand the techniques presently used by TSLA short-sellers, the consequences upon stock price of those techniques, and how to properly trade around them. That is the aim of this message.
Overview
Transactions by short sellers very often exceed transactions by longs trading TSLA stock for any given day. The net effect of activity by some particular shorts is many times greater than the effect one would expect by simply looking at the net change in shares controlled by shorts. This is because the shorts are very prolific at selling and buying and because their transactions are often calculated for maximum negative effect upon the TSLA stock price. This downward push on TSLA is for three reasons: to make money with short term trading, to protect any core short positions held, and to force a continuation of the downtrend, which is the most profitable environment for both general shorting and the use of specialized trading techniques on TSLA stock.
The Good News
The prolific and creative short trading that we currently see will not persist with anywhere near its current effectiveness. Much better days for TSLA lay ahead. Once an uptrend begins, the profitability of short-selling, including many creative techniques, vanishes or is substantially reduced. TSLA is currently priced historically low at a time when Tesla just delivered a profitable quarter with outstanding positive cash generation, and Q4, which is already half over now, will likely be even more profitable. An uptrend brings speculators and day traders back to TSLA. Ever wonder why volume is so slim? It's going to change as we head well into an uptrend. The day traders in particular can neutralize some of the manipulations worked by the shorts.
The unreasonable downtrend that TSLA has experienced in past months is largely due to the creative techniques employed by large, experienced short sellers who have enough horsepower to manipulate the stock price. Of course some stock price decline occurred because of investor fears of the SCTY merger's effect upon cash flow and upon fears of the presidential election and its outcome. Those fears have been blown out of proportion to their true values, however. Want proof? Nearly 85% of TSLA shareholders just approved the SCTY merger. How could such a positive view of the merger coexist with such a negative view of its effect upon the stock price? Here's another one. An intelligent member of our community has suggested that big institutions selling 8 million shares of TSLA in Q3 is largely responsible for a $35 drop in the value of TSLA. Let's see... 4 million shares volume/day x 80 days = 320 million shares traded in quarter and he's theorizing an extra 2% selling resulted in a stock price drop of 15-20%? That's quite a stretch. I point this out because investors will look for explanations to the prolonged downtrend that TSLA has been on and will fail to realize when the conditions that support that downtrend are about to disappear unless they understand the short-selling side of the equation.
How to Recognize Short Selling
Here are two telltale signs of manipulative short-selling. First, if the stock price is showing significant dips followed by immediate near recoveries, you're seeing a sign of likely manipulative short-selling. The deep dip followed by an immediate near-recovery tells us that investors have significantly different views of the stock's value. One or more shorts are selling lots of shares (big dip) and other investors are very quickly thereafter bidding the stock price back up nearly to its starting point. After a few gyrations, the stock price clearly turns negative. Take a look at this classic example of a short-selling induced dip. This Event occurred on October 4, the second trading day after the excellent Q3 delivery numbers were released. Shorts were concerned that TSLA could rise above 215 and then run much higher after crossing a critical technical point. Notice the deep dips, the partial recoveries, and the more deep dips.
Deep dips and immediate near recoveries
Note: wide swings in a stock price don't necessarily mean there's manipulative short selling taking place. For example, in after-hours trading right after the SCTY merger was approved, we saw divergent up and down trading for a short period of time. This was likely the market trying to figure out how to price TSLA after an 85% approval vote of the merger with one part of the news (85%) suggesting higher price and another part of the news (approved) suggesting lower price.
The second major hallmark of manipulative short-selling is strongly horizontal trading at times when the stock has an incentive to go higher. The best recent example of this was Oct 3 when the Q3 deliver numbers first started trading. TSLA jumped up $10 and then leveled off, amazingly so. Just as with Oct 4 when the shorts were willing to go deeper in order to prevent TSLA from exceeding the technically-significant 215 level, on Oct 3 shorts managed to get the rising stock price under control by selling a bit above 214, pushing it down to 213 and then holding it there with more selling.At times the stock crept up to 214, which became the new selling point and when some weakness was detected, the stock was again pushed back toward 213. Longs came away with the incorrect view that fear of the upcoming merger must be the reason for this lackluster response to such excellent delivery numbers. If they looked harder, they would have seen that shorts fought (and won) a major battle to keep TSLA below 214.
Amazingly horizontal trading when the stock should be heading higher
The Three Main Forms of Manipulative Short-Selling
The Mandatory Morning Dip
We Tesla investors have grown used to seeing the stock take a morning dip the vast majority of days within the past couple months. Is this normal for a stock? Of course not. What we're seeing is selling by shorts early in the day with two goals: make money and depress the stock price. Short-term shorts make money on a mandatory morning dip when it discourages longs and the stock price descends further. Algobots are more than happy to chip in with selling if a dip begins, and sometimes weak longs and freelance shorts join the selling too. The initiators of the dip buy towards the bottom of this dip they started and realize a gain. Their short position remains the same for the day, but they made money on the trade. More importantly, the morning dip is a wet blanket over any effort to get a rally started with the stock. Weak shorts are unlikely to jump ship on a morning when the day begins with a dip. It's this fear of a mutiny, of weak shorts buying to close in a panic that concerns the manipulative big-dog shorts, and the morning dip is a control to avoid this undesired development.
The Low-Volume Afternoon Selling Slope
We've all seen days when TSLA trades in a reasonable fashion for most of the day and then goes into a funk during the final hours of trading and the stock price drops as the slope of the daily trading chart heads steadily downhill. There's no support for this move with the broader markets, there's no news to justify the decline, but it's happening before our eyes. What's happening is that short-sellers are selling in these low-volume hours, getting much more bang-for-their-buck in depressing the stock price, due to the very low volumes of late afternoon trading. The stock might have traded in the green when 80% of the day's trades took place, but the business reports focus on the day's performance, and a close in the red (even after trading in very thin volume) is reported as a bad day for the stock.
Capping Behavior
The Oct 3 daily chart gives you a great view of capping behavior in action. It is basically setting a maximum price for TSLA, and selling as necessary to keep TSLA below this number. Usually it occurs around a whole number. If the stock shows some momentary weakness, selling can be accelerated a bit to push the price down to the next whole dollar. If too much effort is needed to hold a price, the stock price can be allowed to climb a dollar and a new cap is established there. Capping behavior is profitable for the short-seller if it is successful. A success means that the price never for long exceeds the chosen price caps, and once the stock sinks lower, the capping short-seller can buy to close at a nice profit.
The Defenses for Manipulative Short Selling
Defense 1: The Mandatory Morning Dip- The solution is simple: consider the short-sellers as generous souls who are subsidizing your purchase of additional TSLA shares. When you think the dip has bottomed out, buy then. Don't wait too long because sometimes the dip retraces quickly. Never buy on open. You know the dip usually occurs. Take advantage of it.
Defense 2: The Low-Volume Afternoon Selling Slope
Often, the best price of the day will be found within half an hour of closing, sometimes much closer to closing than that. Ask yourself if there's any justification for this selling. If not, you're getting a discount. Wait until as close to closing as possible, before there's any significant rebound in the stock price and buy then. It's a pretty good rule of thumb for getting the best price that day once an afternoon low-volume selling slope is established.
Defense 3: Capping Behavior
This is a tougher nut to crack and here's why: all traders, short and long, make money by buying low and selling high (but not necessarily in that order). Capping behavior works so well for shorts because they enter a position by selling, and they are selling at the highest price you'll likely see in days. It's easy money if you are a big-dog short with the horsepower to cap the stock price. Unless you have the funds to trade 5,000 to 10,000 shares at a time, you're probably not going to dent the cap. Don't even consider taking one for the team if you're a small investor, you're just going to be buying high, which we all try to avoid. Your best bet is to look for a capping effort that may not succeed. You're looking for a chink in the armor. When you see the cap giving way to buying pressure, there's a chance to buy right then and possibly ride the rally to the next higher level. Here's an image from Nov 17, the day the merger results were announced. Look at the cap that was placed at 187. It wasn't defended well and began sloping up. You could buy not much higher than 187 and sell at either an immediate gain of 189 or hold until after-hours and sell at 192.
The Bigger Picture
The ability of shorts to push TSLA down on any given day is the little picture. The big picture is the false narrative which this trading creates. If the story the shorts were telling was a book, it would belong in the fiction section of the store because it's not a true story. It's an illusion, a fantasy being sold to longs and plenty (unfortunately) are buying it. The story goes something like this: Tesla is trading at 185 now because two events have reduced the value of the stock, the presidential election results and the extra risk brought to Tesla through the SCTY merger. The story is false, however, because while we don't really know the full impact of a Trump presidency on TSLA, Elon has presented good evidence that any disappearance of subsidies (probably won't happen though) hurts competitors more than it hurts Tesla and because initial communications coming from the Trump camp is that he has no ill-intents for clean energy. Peter Teal having the president's ear doesn't hurt, either. As for the risk of the merger, Tesla projections are for the ability to reach Model 3 production without the need for any equity raises. If you are someone who doubts Elon and thinks a billion will be needed, then that money will likely come early in 2017 after Q4 delivery numbers, ER, and guidance sends the stock higher. Let's say there's some big problem, though, an earthquake in Fremont or something. Musk is a billionaire with multiple billion dollar businesses and he has the resources for arranging a billion dollar loan, in a tight situation. Do any of you believe for a minute he wouldn't accept the risk to save Tesla?
And so the question is not whether Tesla will have the resources to reach Model 3 production. It can find the resources if it needs them, thank you. The question is "When does TSLA climb out of this trading funk and begin a serious climb higher?" The games played today by the shorts become more difficult and sometimes impossible once TSLA begins a long uptrend, and it's time for that uptrend to begin. Given the excellent performance of Tesla the company in the past quarter, how can today's price be seen as anything other than oversold?
The mere understanding that a large percentage (and I believe it is the greatest percentage) of TSLA's stock price decline in recent months is the result of heavy, manipulative short-selling brings a different frame of mind to Tesla investors. The downside for the stock is limited while the upside is immense. It is time to accumulate but time to accumulate intelligently, with a knowledge of how the short-sellers operate.
An understanding that Tesla's future is bright and that the short sellers are going to be losing a good deal of power when the stock performance turns positive should be something that you embrace.
What do I see as the biggest threat in the next 6 months? I think it is macros. I'm not predicting anything negative in macros, but I am a realist and believe TSLA is not immune to the macro winds, primarily because Tesla investors haven't yet found their mojo again.
Is it only clear skies ahead? Of course not. Shorts aren't willing to let go of promoting the illusion that Tesla is suffering from fears of the SCTY merger. I'd be surprised if they don't try to resume their selling Monday morning and sell the fictional story of Tesla being gorked because of all the risk involved in buying SCTY. Study the trading styles of the shorts, buy when it makes sense, and once the uptrend is firmly established you will see that the degree of manipulation we're seeing from shorts will shrink to a much more manageable level. The shorts need fear in the hearts of the longs to succeed. See through their illusions.
