Chart of the week: has Tesla met its final Wall of Worry?

After hitting a record high last month, Tesla shares have struggled. Technical analyst John Burford draws up new charts to see where the stock price might go next.

In my COTW of 18 October, I had a very firm forecast that from the current price at the $850 area, Tesla (NASDAQ:TSLA) shares would advance above the previous all-time high set in January at $900 in a final fifth termination wave. My stated prediction was that when that wave terminated, it would enter a solid downtrend. Events since then have lined up well with that forecast. Investors were thus offered a rationale for taking profits.

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Recall the chart I posted in October:

Past performance is not a guide to future performance.

But I confess these labels are only part correct as far as they go except that my wave 5 high at the all-time high also carries a much more likely wave 3 label of a larger count. In other words, the a-b-c correction comprises wave 4 and my forecast to a new high is the final fifth wave stands, as I stated. 

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Remember, the basic tenet of Elliott Wave theory is that when a trend (up or down) has traced out a strong five-wave pattern, the next major move is a decline in three waves (or variation thereof). I call this the 'five up, three down Rule'. It can be observed in any time scale.

One more rule is that when bullish sentiment reaches an extreme (where all or most of the data point up), that is where major corrections often start. Traders (and Mr Musk) use this observation to take profits when everyone else is buying (near the top).

Here is the chart updated with my much more likely labels:

Past performance is not a guide to future performance.

Indeed, the shares did move much higher in wave 5 to the high at $1,240 on 4 November. In fact, the advance from my October COTW was almost vertical (a buying panic)! It followed the release of the latest sales figures that put the Tesla Model 3 as the best selling car in September – pushing the ever-popular Renault Clio into second place.

It seemed then that Tesla would take over the world! Imagine – a very expensive electric vehicle (EV) outselling an established, much-loved and much cheaper internal combustion engine (ICE) model. And its name isn't even designed to set the pulse racing!

But just as the sky seemed to be the limit for Tesla, a brick wall appeared in the form of the infamous Twitter 'referendum' that ordered Musk to divest 10% of his holding – a not inconsiderable pile of shares and options. The shares were then trading around the $1,240 high.

So was that the final Wall of Worry the shares could not scramble over?

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Suddenly, more ‘walls’ are popping up from the recent worry over lithium supplies and the rocketing price of copper and aluminium.

And here in the UK, the recent storm has knocked out power supplies for more than a week to northern regions where the Teslas are going nowhere fast (while ICE vehicles remain mobile). That surely has not helped driver sentiment to switch.

That is highlighting the immense cost of upgrading the capacity of the national grid to accommodate the planned take-over of EVs.

All of a sudden, the outlook for EVs is not so rosy and a decent reality check is due.

John Burford is the author of the definitive text on his trading method, Tramline Trading. He is also a freelance contributor and not a direct employee of interactive investor.