Tesla Is Overweight, Time To Short It

First, let me apologize if, given that this is inauguration day, you were expecting me to write another piece about investing under President Trump. It is not that I don’t believe that the fossil fuel industry will do well under the new administration. That seems to be rather obvious, but has also been said many times, and if you aren’t positioned for that now it is a little late. Given that dynamic and my background as a trader rather than a long term investor I would rather focus on a short term trading opportunity than attempt to look forward four years. With that in mind, the chart is now suggesting that it is a good time to once again short TSLA.

(Click to enlarge)

Taking that position is always a risky thing to do for a couple of reasons. First and foremost Tesla is an innovative, disruptive company that makes cars that are, according to almost all reports, superb, and may well be the future of the automotive industry. There are legitimate questions about when they can show a consistent profit on a GAAP basis, but they certainly look to have a future. Second, many investors in the company see it more as a religion than a rational investment and flock back to the stock on any sign of weakness.

That said, though, there does seem to be a point at which others begin to feel that the stock is overvalued and proximity to the fifty two week high at around $270 and the fact that the strong run up since the beginning of December ran out of steam at around $250 suggest that TSLA may be about to take one of its periodic drops.

Regular readers will know, however, that no matter how tempting a chart reading makes a trade that is rarely enough for me to pull the trigger. I like to have a logical fundamental reason behind anything designed to run more than intraday, and one can easily be made for shorting Tesla. For that, in large part, we must return to today’s inauguration.

The nomination of Rex Tillerson (former Exxon CEO) to the State Department, Rick Perry for Energy Secretary and the serial EPA litigant Scott Pruitt to head that agency makes it clear, as I mentioned in my introduction, that this administration will be pro fossil fuel. What they have proposed so far in the energy field; relaxation of regulations, free access to drilling on Federal land and improved infrastructure, will all no doubt benefit the industry long term, but the resultant increase in supply here in the U.S. could easily stall the gradual recovery in oil prices, and even send them lower again. With that would come even cheaper gas than we have now and that will not help Tesla in the short term. Over time, of course, those motivated by environmental concerns or a simple love of the cars will not be deterred by the relative cost, but this is, as I said, a fairly short term trade idea.

I cannot stress enough though that if this is a trade that you would consider, you must approach it with risk management uppermost in your mind and with clearly defined parameters. My preference would be for a sale at around current levels ($246) with a stop around ten percent away, just above $270. As a quick aside, it is important to remember when placing a stop on a multi day trade like this that it be set Good Till Cancelled (GTC) rather than the one day timeframe that is the default on most platforms. The same goes for the target part of the order, which in this case would be somewhere around $200, or a potential profit of close to twenty percent. It is that tempting risk/reward ratio and the fundamental and technical arguments for a short that make this a viable trade.

I guess, if nothing else, a risky position such as this will at least give me something other than the political news to follow over the next few weeks, and for that I shall be suitably thankful.