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Some views on current price action

Discussion in 'TSLA Investor Discussions' started by jesselivenomore, Apr 20, 2016.

  1. jesselivenomore

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    #1 jesselivenomore, Apr 20, 2016
    Last edited: Apr 20, 2016
    First of all thanks guys. I'm glad to be back.

    Ok so it seems like the general consensus I've been reading here is that we have topped out for the time being with few upcoming positive catalysts now that the Model 3 unveil is over, and an underwhelming Q1 report. The general feel seems to be we are in a lull period and many are waiting for price to pull back(220, 200, 180?) to buy. I don't want to put words in anyone's mouth but this seems accurate?

    This view certainly may prove to be true, and it would be the safe call after such a steep run with no pullback. However, I am seeing some signs that point to an alternate outcome. Before I go any further, I'd like to emphasize that whatever evidence I may present, the conclusion is still probabilistic in nature - there is no sure thing when it comes to trading. Back in January when we first approached 200, I presented a contrarian view that saw risk to the downside due to macro conditions. That does not mean I knew we would go to 140, or even that I knew we would go down at all. Just that there was high enough of risk that was not being discounted by the consensus here at the time. Similarly, I see risk that is not being articulated currently - except this time it is to the upside.

    Technicals

    Let me first say that through my years of trading which have been heavily reliant on technical analysis, the best setups were the seemingly obvious chart patterns that were piled in on by unsuspecting traders, only to result in counter-intuitive outcomes that defy consensus, which leads to a violent reaction. An example would be on 12/29-12/31* when TSLA traded above the 200 day SMA. To many this signaled a breakout to the upside. However, the low volume was the warning sign that hinted otherwise. Around that time I posted in the TA thread that a breakout and all clear signal needs to be accompanied by above average heavy volume for confirmation- which I defined as >5M shares then. This false breakout did not meet that requirement, and on 1/4 when slightly worse than expected deliveries were reported, the reaction to the downside was exacerbated over the following weeks. Obviously there were many other factors that came into play, primarily fearful macro conditions that led to the majority of the decline, but the first red flag was this false breakout that tricked many longs.

    *
    falsebreakout.PNG

    Back to now, similar false setups have occurred and are currently occurring, but this time for the shorts.

    False setup 1

    The major breakdown through 180 in early Feb signaled a long-term trend reversal to the downside that caused many shorts to pile in(and some longs to exit). 180 was a significant support level for over 2 years dating to early 2014. Once we traded below that, shorts increased their positions all the way to the bottom at 140 as indicated by short interest reports. As price started to bounce after Q4 ER, I speculated at the time that the rise was not due to short covering, and that indeed shorts would further increase their positions:

    It is only natural to do so(and later confirmed by short interest reports). From a long's perspective you do not like chasing a stock high and would rather wait for a dip to buy or add. Similarly, shorts looking to enter or add after the major breakdown through 180 were waiting for a bounce after such a steep decline. The only problem was, this entire setup was a huge false signal.

    Forget technicals for a moment and examine what actually happened in the real world. This entire "breakdown" was not due to the stock losing momentum over the years, or company-specific issues(Model X non-launch contributed only slightly- we are still having some issues yet price is 250 now). Rather, it was because the credit environment dried up due to fears over oil related debt defaults. TSLA was particularly affected due to the view that it is dependent on access to the capital markets in order to expand, or perhaps even survive(cash levels were decreasing at $400-600M a quarter at the time). These fears were the primary driving force for the crash to 140. But then came a double-whammy.

    First, during Q4 ER Tesla directly addressed these fears by stating a capital raise was not necessary in 2016. This was hugely important and I outlined it as the reason why I reentered my long position at 150 after selling at 220. You have to understand the reason for the fall to appreciate what would make it rise. Now, perhaps Musk was bluffing at the time, but that is irrelevant now. Because what happened next was the oil markets stabilized and have since rallied - which means the credit environment loosening back up and everything went back to normal.(Yellen has also been highly dovish in her statements since then) It was as if the crash was a giant "oops" and none of the fears materialized. Technically it is visualized as a giant hammer reversal candle on the monthly chart** which I also talked about in the TA thread.

    **
    hammertime.PNG

    I know some are averse to TA so I'll just briefly describe what it meant here. Price temporarily spiked down to a certain level, but recovered completely within that same timeframe(monthly) - this usually represents capitulation, but in this case it actually was the visualization of an error in market expectations. Once rectified, It was as if nothing even happened in that month as it closed where it opened.

    Except something did happen. The false breakdown sucked in an increase of 5M shares short from 12/31 to 3/31. In fact, even compared to the lows around 2/12 there was still an increase in short interest in the 3/31 update(perhaps it has decreased since the Model 3 launch). This is the reason why it is still relevant now, even though the false setup occurred in the past. It has yet to resolve itself as it's participants are still stuck holding the bag. Compared to the 12/31 example of the false breakout when longs were tricked and exacerbated the ensuing decline, not only has this entire rally not been exacerbated by a short squeeze, short interest has actually increased compared to the lows.

    False setup 2

    A common technique in TA is something called an analog. This is not some specific chart pattern, but rather when a period of current price action closely resembles some past price action. The idea is that price action is caused/affected by the psyche of buyers and sellers - so similar price action represents a similar state of mind. And since on a broad enough scale human behavior follows certain patterns, this has predictive value. Analogs can occur not just within one stock, but across equities or even cross asset classes. Let's say the price of corn is behaving now identically to how INTC traded in Feb of 1983. That may sound ridiculous. But, consider that the price of both assets are driven by humans looking to make a profit and experiencing gain and loss in real time. If indeed the price action was identical, perhaps the state of the psyche for the buyers/sellers in these two different time periods and assets was similar as well. If so, then there is predictive value in seeing what INTC did in Mar 1983 to gauge what the price of corn will do next. (just a made up example, pls don't trade corn based on this)

    So with that said, TSLA is currently in an analog of its own prior price action. Consider these two charts, particularly the shape of the last 4 candles in each chart:

    ath.PNG now.PNG

    These are not cut and paste, but rather TSLA during two completely separate time periods. They are both weekly charts, the first one from 7/21/14 to 9/8/14 and the second one from 2/15/16 to last week. And this following chart is a full view of the price action after the week of 9/8/14, which yes was the all time high:

    yikes.PNG

    Well, that certainly seems ominous.

    And since it has yet to play out, it very well might still turn out to be. We will find out very soon. However, I have a theory about how this may be a major false setup, and some possible proof to back it up.

    When it comes to TA, it is not black and white when it comes to right or wrong. In fact, what is most important is the logic used in the interpretation. So while there is no argument that the price action in these two periods are damn near identical, my view is that the circumstances and thus the psyche behind the buyers/sellers in these two periods are completely different. Exhibit A:

    short.PNG

    Short interest throughout TSLA's history has generally ran inverse to price, which makes sense. If you examine the 9/8/14 peak(all time high), you will notice that short interest was at the lows of its historical range. This was also the case during the July 2015 highs. However, look at what is happening now. Short interest is at the top of its historical range while price is also near highs. This runs counter to the past two rallies to this area, and it tells me that the current state of the psyche of the market is vastly different than those prior peaks, including the 9/8/14 analog in question.

    Low short interest during the all time highs represents complacency in the market. While current historically high short interest certainly makes a different market dynamic. We've had this discussion in the past regarding a potential short squeeze. I have stated many times during the initial rally off 140 lows that there was no squeeze because most shorts at that time were still profitable on their position. There was no pressure or urgency or pain to force anyone to cover, therefore no squeeze. That is not quite the case anymore at current levels. To tie in a bit with what we just talked about before, the high short interest currently is not even random or premeditated. They were tricked into it by a massive false breakdown highlighted in false setup 1. There are no shorts who entered or added at or near 140-180 who now feel comfortable with their position. This is the key difference in the analog we are looking at.

    But of course that is still somewhat speculative. Is there proof to this difference in market psyche? Let us go deeper:

    crack.PNG

    This is the daily chart around the week of 9/8/14 in question. The top of the market and subsequent multi-month decline was triggered 7 trading days following the day of the all time high, on 9/15/14 with a massive day of distribution on heavy volume. What the heck happened to cause this $25(over 9%) fall? A massive earnings miss? A slew of car fires? (if you're wondering, the SPX was down 1 single point on this day, or less than 0.1%)

    This was the big news: Caution from a fan sends Tesla shares tumbling

    Our friend Adam Jonas who at the time still had a $320 target and 25% implied upside simply expressed some caution over China growth and how much the Gigafactory can cut costs. There was also some good news with a favorable court ruling in MA. That's it.

    6 trading days prior to this(the day after all time highs), Elon Musk also mentioned that the stock was "kind of high."

    Tesla sinks after Musk's 'kind of high' comment

    What does this mean? It highlights the high level of complacency and fragility in share price at the time. There is actually an intraday chart in the first link where you can see how it declined relentlessly without a buyer in sight. The longs were exhausted, and as we know the short interest was at lows so there was no one to come in and cover.

    Going back to our ominous looking analog, how does this compare to market psyche now? I have expressed my views on it, but is there anything concrete?

    Well, funny thing is that precisely 8 trading days after hitting the recent highs, the Consumer Report's falcon-wing-gate hit, and the stock started to sell off precipitously. You can be sure that this raised my eyebrows yesterday. Was a repeat about to happen? The analog was actually going to playing out?

    But then, a curious thing started happening midday - buyers stepped in. This is in stark contrast to how we reacted to bad news during the week of 9/8/14. As a matter of fact, since last night through today, no less than two other publications -WSJ and Forbes- published their own falcon-wing-gate pieces curiously with their own separate anecdotal owners to interview. Almost as if it was.. coordinated or something. I won't go there. But no less, as hard as the market tried to sell TSLA off, we once again found buyers and bounced.

    It is very early and perhaps we do still crack eventually. But, from what I have seen so far it is fair evidence that confirms my suspicions. The current market psyche is vastly different compared to 9/8/14. The short interest is on an opposite spectrum, and market reaction to negative news has been night and day. For these reasons this analog is voided in my eyes. Which means, yes, potentially it is a massive false setup.

    Just for good measure, Elon Musk also commented on the stock price recently to complete this false analog. Two days prior to the recent high, he cautioned that shorting would be "probably unwise."

    Fundamentals

    I will keep this brief since there are many here more knowledgeable than me in this area. Just a couple observations.

    - The expected capital raise that many are talking about would be a major positive catalyst in my opinion. There are some who fear this because the potential need for raising capital was the primary reason for the crash to 140. The two situations are not at all analogous. The fear at the time was that Tesla may need to raise capital if they run out of cash. In a distressed environment with capital markets closed, it puts Tesla in a very tough bind. The fact that we are discussing a capital raise now is because demand for Model 3 is so high that Tesla needs to grow faster to satisfy it. It is an incredibly enviable position to be in!

    As bulls you should know by heart now that TSLA's market capitalization is driven by discounted future cash flows as oppose to current fundamentals. Raising capital to accelerate production ramp increases the future part of the equation, which greatly drives TSLA's valuation. "Dilution" that the bears are hoping for will not(imo), and has never before affected share price in any prior capital raise. In fact every prior raise triggered either temporary or longterm share appreciation. The market understands that the capital is put back into the company to increase future earnings, it is not dumb.

    A massive capital raise either through secondary or debt, maybe with partners/investors, would greatly de-risk the company from any future macro disruption, and set up a new and higher benchmark for future cash flow, which would cause current share price to recalibrate.

    - The massive Model 3 preorder amount has resulted in a $20 appreciation based on current share price. I get the impression that some feel this "catalyst" is over now, so on to waiting for the next one. IMO this misrepresents how big of a deal it was. As much as we always talk about being "supply constrained", after any quarterly/yearly delivery miss doubts over demand seem to creep into the back of the market's mind. With the Model 3 preorders, while not yet revenue in the bank, it gives tangible evidence for future demand. In fact the narrative has already moved entirely over to questions over production.

    One more thing about Model 3 orders is that I have read in many places how this signaled Tesla's arrival to the "mass market" consumer. This is a misnomer IMO. When I stood in line to preorder on the 31st, I did not see any mainstream buyers. Heck, "mainstream" buyers do not preorder anything, much less stand in line for it.

    Truth is, the Model S initially didn't just sell to early adopters - specifically, they sold to wealthy early adopters. The Model 3 preorders were a result of a much broader range of everyday early adopters. The mainstream buyer is only now waking up to the concept of an EV or Tesla. Heck he is still half asleep. Wait until 6 months to 1 year after the Model 3 hits the streets before you see mainstream buyers en masse.

    This is an important distinction because it further illustrates how big a deal 400k early adopters in the first 2 weeks really is. And is a hint of the eventual total market size. I am not quite sure if share price has totally grasped all that yet in this $20 move up. But it may start to after each passing day.

    Conclusion

    Wow that was long. So originally I was going to put this post in the short term thread, but it may be too much of a tl;dr for that. So I will start a new thread for this, not because I think my views are so important, but just not to clog things up. I guess this is 2 months worth of my posts put into one to make up for lost time :)

    I do not suggest anyone to trade solely based on this. It is just some things to think about as you form your own decisions. Perhaps we pullback as many suspect, I am not suggesting we won't. However, there is a non-negligible risk to the upside right now based on what I've talked about above that seems under-represented in the current consensus.(believe it or not) So it is a possibility worth considering.
     
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  2. DaveT

    DaveT Searcher of green pastures

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    Completely agree with you. Fantastic post.
     
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  3. MitchJi

    MitchJi Active Member

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    Hi Jesse,

    Welcome back!

    Great explanation of the recent price resiliency!

    I posted that in the ST thread yesterday. A similar outcome, reached in a different way?
     
  4. uselesslogin

    uselesslogin Enthusiast

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    Thanks for the post! I must say I've been very surprised the price held up with the recent articles. I hope your theory is the correct one.
     
  5. AlMc

    AlMc 'Senior Moments' member

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    Great post. Nice to have you back. I am at work as I type this so I will have to reread and add discussion later.
     
  6. FredTMC

    FredTMC Model S VIN #4925

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    Excellent Post Jesse! This is the best TSLA stock post on TMC in a very long time. Thank you for sharing your deep and thoughtful insights
     
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  7. Wenche

    Wenche Member

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    Thank you very much, and welcome back! I really appreciate that you created your own tread to cover your views. :)
     
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  8. jesselivenomore

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    #8 jesselivenomore, Apr 21, 2016
    Last edited: Apr 21, 2016
    Thanks guys.

    Also of note, how this will play out is somewhat dependent on macros(as usual). We are close to a tipping point in the major indices where we will either break to all time highs or pullback again. GOOGL and MSFT earnings after the close today could be enough to decide things one way or another, so those are definitely worth keeping an eye on.

    I do not have too much conviction when it comes to overall market direction right now. Although one observation that stands out is how unusually negative the financial media has been throughout this rally. Generally that is a contrarian indicator. The next time the talking heads call a market top or bottom correctly would be the first that I can remember.
     
  9. Fallenone

    Fallenone Active Member

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    Thanks a lot for the post Jesse. I agree with you for most part of this part. Just want to nitpick one thing: the recent CR report and similar reports from other media. IMO the CR report is no where near as a negative surprise as the Sep 2014 downgrade one. X issues are pretty well known for months before the CR report if the investors are closely following TSLA so I think SP has priced in it already. AJ's note OTOH, is a surprise. Also, Daimler was unloading its stake (~10% IIRC) around Sep 2014 so there's your heavy volume to the downside.

    Back to short to mid term SP movement. I don't think we are at top yet, but see little reason to go a lot higher before substantial good news, such as declaring a major partner like Panasonic's partnership in GF1, EPS huge beat, FCF positive. The Model 3 reservation numbers are great, no question here, but it is too far down the future for the market to care about it. Especially if you consider the following to things: 1) it seems X ramp-up is yet to be flawless, this adds to the doubt of Tesla's ability to meet demand; 2) while we all know Tesla is burning cash mainly due to investing in future growth, the fact it is losing money every quarter does give hard proof to bears to question Tesla's profitability on the Model 3. So IMO, some substantial and solid progress/news on increasing production capacity (like that France nuclear plant location offering recently, even it was rather weak, still gave SP a boost), and/or FCF positive are required to rocket up the SP. Because these two things are at the core of the long-term bear thesis and hence have the power to trigger massive short squeeze, provided we are still at this level or higher. Then it would be superb to raise capital, taking advantage of those burnt shorts, again.

    That being said, I don't know when they would announce solid, credible plan to accelerate Model 3 production. But on the FCF positive part, Q1 is out of the window with the miss on delivery plus repairs for early X that eats into gross margin. If they really perfected the X ramp up this quarter (at least 750/week consistently and without the current level of malfunctions we are seeing right now), Q2 could be a blast. However, Q2 ER is in August, still four months away. EM and company need to help maintain the current SP during this whole time. So let's see what they have in their hand (potential positive catalysts):

    Rossy outlook for Q1 ER
    GF opening party
    Great reviews/awards for X
    Announcement of partnership on production (China is likely, since EM said in Jan they would probably confirm one in the middle of this year)
    Delivery beat for Q2, announced in early July

    There may be more but I think they should have enough. But again, two of these are based on X ramp-up. So IMO X ramp-up is like a lid put on the SP, it needs to be solved before next leg up.
     
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  10. Fallenone

    Fallenone Active Member

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    And on the TA side, monthly chart so far still good if we maintain at this level. The text book hammer reversal in Feb and confirmed in March is doing quite well. Until we see a reversal to the downside, like the shooting star last July, I don't think there's much to be worried about.
     
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  11. Fallenone

    Fallenone Active Member

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    Instead of GOOGL/MSFT and other tech companies, I would rather keep a closer eye on oil. Tech companies haven't fall short on earnings all this time, it was oil price that dragged the energy sectors EPS down so hard that it negated other sectors' profits contribution to the overall EPS of SP500. Plus, you get worries about default from energy companies and the consequences on banks (DB as the prominent example). Good thing is oil has reclaimed 200 MA and holding well so far. Market ignored Doha which is also a good indication of a continuous rally in oil related sectors. So I'm not very worried about the macro right now.
     
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  12. dc_h

    dc_h Member

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    Any thoughts now with MSFT and GOOG down big? Oil has to get a dose of reality and fall sooner or later. In the past if the Saudi's were made at us, they would withhold oil, now if the 9/11 papers are released, they will more likely further flood the market and try to finish off fracking for the next decade. On the upside, Tesla has $400mm to speed up the Gigafactory by a year, or pay their portion of a factory in China, but that is not likely to be announced before earnings. Earnings is only a couple weeks away, any upside issues? I would like to see a modest drop to $220-230 range before earnings, which I think will surprise on the upside.
    Anyhow, welcome back. Great thread and analysis.
     
  13. jesselivenomore

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    Not really, still don't have much of a read on macros right now. I figured that with markets at a tipping point, expected big moves in 2 of the largest companies in the world would be worth watching. But whether it ultimately decides the fate of the entire market is still unclear. So far the damage has been relatively isolated. SPX is only down marginally and RUT is actually up, so that's encouraging for now.
     
  14. jesselivenomore

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    #14 jesselivenomore, Apr 22, 2016
    Last edited: Apr 22, 2016
    I appreciate the reply Fallenone.

    For a breakout above all time highs I agree that a major fundamental catalyst is required. A clear path for accelerated production and capital raise would be such a catalyst. I understand your view that showing positive FCF first would be optimal in maximizing share price before the capital raise. While that's true, I am not sure we have the luxury anymore after seeing these preorder numbers. If Tesla plan on sticking to their target of late 2017 launch, and if preorders increase by then to what I think they will(approaching 1M after reveal "part 2"), plans for increased production need to go into effect now. Waiting until FCF+, which like you said may not be until August, leaves them little room for error. I could be wrong about this, maybe they do decide to wait. But the risk that they won't is something I don't want to bet against.

    Combined this with the the conditions I mentioned that are supportive to price, and that's why I think there is a risk to the upside. Again, I'm not even saying it is a hugely high probability, just that compared to the sentiment of the ST thread at the time of my post, it is perhaps higher than people there were discounting.

    Not sure I agree with this. Here is another link that goes into a little more detail about AJ's note: Biz Break: Tesla plummets after bullish analyst pumps the brakes

    It was really rather mild. He maintained his $320 price target and Buy rating.

    His comments on China were not even bearish like the prior article implied: "We believe demand for the Model S and X in China will far outstrip Tesla's ability to meet it, perhaps for many quarters or years to come," Jonas wrote. "Challenges with infrastructure, local business practices and impeded technology enablers could prove agonizingly tough to develop as fast as the market's expectations."

    He is questioning production here, not demand.

    His cautious statements were: "Recently when asked about Tesla's stock, Elon Musk admitted he felt the share price was a bit ahead of itself," Jonas wrote. "We agree."

    Jonas maintained his price target of $320 with a rating the equivalent of "Buy" and said he still believes in the stock, he just thinks other believers are wrong in their reasons, writing, "we do not expect the stock to appreciate so consistently and one-directionally from here."

    I mean, in essence, saying the stock might not keep going straight up is hardly doom and gloom.

    Also regarding the Daimler sale, all the links I found were on 10/21/14, and some even mentioned how they sold a bit late since it was already 20% off of the all time highs by then. Daimler Sells Its 4% Stake in Tesla

    Was there a filing or source that said they sold on 9/15/14?

    With the CR report, while production issues have been long known and priced in, this report was about quality issues and implying that the product could be unusable. While some of the door issues were known to forum members, I believe it was news to the market.

    I'd also note that just a couple of weeks ago TSLA was initiated/downgraded to SELL by both Colin Langan of UBS and Standpoint Research. Now, I am not sure anybody has heard of Standpoint before this, so that might not count. But they did get an inordinate amount of press coverage particularly on CNBC for 3 straight days. I am not saying either of these are as high profile as Adam Jonas. But, if price here was as vulnerable as it was around 9/8/14, the market would have used any excuse or hint of bearishness to sell it off.

    Again, while these are my observations, you could say that it is not concrete proof of a change in sentiment. What is undeniable though is the vast difference in short interest when you compare the two periods which has to contribute to a change in market dynamics.
     
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  15. AlMc

    AlMc 'Senior Moments' member

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    #15 AlMc, Apr 22, 2016
    Last edited: Apr 22, 2016
    Since it is my feeling that a cash raise (for quicker model 3 production) would be a positive catalyst and most people feel (myself included) that Q1ER might be a negative catalyst I am trying to see the EM/TM reason for waiting to raise cash. I thought when we hit $260..or even now in the mid 250s might be a good time.
     
  16. Johan

    Johan Took a TSLA bear test. Came back negative.

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    Jesse I read your post yesterday but re-read it properly today and took the time to digest. In the light of the Tesla Energy news today and the careful yet positive stock reaction I think you may have called the coming upside scenario. The strategy by Tesla where they just, out of the blue, update their website and publish pricing and ordering info for PowerWalls and PowerPacks usually means that there will be further and far more important (financially) news to follow in the coming weeks. At a first glance Tesla's communication strategy can seem haphazardy but when you've followed them for a while you learn to pick up the sentiment quickly. I think you saw the pattern forming in the technicals jesse.
     
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  17. Fallenone

    Fallenone Active Member

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    Hi Jesse, thanks for the reply. I too think they should start expanding their production of Model 3 right now. If they need more money, raise more capital. It's just if they do it in May, then it would be going back on their language in just 3 months, plus adding to the perspective that Tesla is an unsustainable business given FCF negative. I'm not sure how the market will digest it. For the super long term, 5 years and beyond, whether they do it in May or August or even next year wouldn't make huge differences. But for the short to mid term (up to 6 months), I'm really not sure how SP will react. It could delay a breakout to 300+ and keep us range bound for another year.

    I also want to make another observation regarding to the news for Powerpack. They riased the sell price to 470/kwh from 250/kwh. This could be huge:
    1. Looks to me they are confident in demand.
    2. The gross margin, even without fully functional GF, is now huge for energy storage.
    3. If the above two are true, this could fund their expansion plan without a big capital raise, at least not urgently.
     
  18. Fallenone

    Fallenone Active Member

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    Ah you beat me to the Powerpack
     
  19. Fallenone

    Fallenone Active Member

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    Oh and on that Daimler thing, I remembered it triggered a massive down day on heavy volume. I just forgot there were two days like that in 2014 :D
     
  20. farzyness

    farzyness Food lover. Entrepreneur. Did I say food lover?

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    Thank you jesse for an insightful post!
     

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