Lower Highs Meets Higher Lows…Pennant Formation Portends Large Move Soon

Tesla shares have rallied hard over the last year on the back of a lot of good news. The company managed to correct manufacturing issues, and get their Model 3 to market on time and with a huge backlog of orders. This strong showing operationally, after many stumbles in previous years, led to a strong rally from $180 a share last October to recent highs over $380.

The technicals on this move were quiet solid as Tesla had a strong upwards trend with a series of higher lows. Recently, however, the stock hasn’t been able to break through its June highs. And, while the higher lows has stayed intact, we also are in a new trend of lower highs.

The result of these two trends is a classic pennant formation. One in which we are nearing the pointed end; which means that we are about to break out of the pennant, and the resulting move could be quite dramatic.

Which way will we break? Well, as hesitant as I am to speak ill of Elon Musk, a true visionary genius, it seems to me that the upcoming breakout will be lower.

Here’s why I feel that way. It comes down to four issues that stick in my craw, the first of which is a lack of execution. Over the time of Tesla’s inception up to today, they have usually missed timelines. There is no reason to believe that this will change, however the Company is no longer the only player in this industry. They have put themselves, through their innovative success, squarely in the sights of all the other car manufacturers. As such, they need to work on making a lower margin/higher volume business profitable and they have yet to do so.

My second worry about Tesla is government subsidies. How much elasticity is there in pricing for their cars? For the Model S, a truly revolutionary vehicle, there was tremendous demand at very high prices. However, the Model 3 is a car for the masses and will be widely available. Thus, the $7,500 government tax subsidy for buyers is an essential selling tool. Not many people realize that this program is not endless…it begins to go away when a car company sells their 200,000th electric vehicle. Which is a milestone that Tesla will hit next year. Will demand drop when consumers no longer receive this tax break? It’s certainly a concern.

The third area of concern is the insider selling, which could lead to a lack of “cache” around the shares. For several years, investors were pretty much putting their faith blindly into Elon Musk. Now, you have people like Jurvetson (of Draper, Fisher, Jurvetson) selling all his remaining shares. Perhaps the allure of being part of the club of Tesla investors is fading? At some point, as the Company continues to require additional capital, it is no longer a situation where there aren’t enough shares to go around. When founders like Jurvetson bail, it could be a big signal.

Finally, valuation concerns appear to be surfacing for the high flying tech stocks. Tesla has been riding the wave of Facebook, Apple, Amazon, Google and Microsoft as investors narrowed their focus into a few big winners. Now, however, the group appears to be have run out of steam. If this is the case, there will be spillover into the other high priced stocks, such as Tesla. Which implies a break of the long term uptrend and a downward move from this pennant formation.