Chart of the week: How to play this expected bounce

Out of gas, are Tesla's wheels now falling off?

In my COTW of 21 August, I asked: "Is Tesla out of gas?" I asked it rhetorically since the urge for speed had leapt into the stratosphere, as had the manic surge towards the sunny uplands of the electric and self-drive transport revolution - lead by that most glitzy of operations, Tesla.

Incidentally, its founder Elon Musk was canny in naming his company after Nikola Tesla, an unconventional inventor and physicist whose inventions were often years ahead of their time. I recall my school physics lab had a Tesla Coil which also featured in just about every early sci-fi film with its eponymous crack, hum and lightning flashes emanating from the large metal spheres!

But is the car company likewise ahead of its time, as the bulls maintain?

I had been following the share price upwards into the summer as hope built upon hope that the company would finally turn a profit when the 'affordable' Model S would be in full production.

As I stated in August, I had severe doubts the bull run had much further to run. My judgement was based on the chart patterns and the extreme bullish sentiment at the time. Here is the chart I presented:

From the December low, I have a very clear five motive waves with a long and strong third wave (which contained its own five up). The only missing feature I like to see was a momentum divergence between waves 3 and 5 highs (see later).

But the sharp decline off the $380 high told me the rally was in trouble. In fact, the decline was turned right at the usual point - at the fourth wave low of one lesser degree at the $300 level.

Now the recovery off a sharp decline from a wave 5 high can provide many clues as to the likely upcoming price patterns. From that low in July, the market staged a healthy recovery, but in three main waves (green bars) - and three waves are always counter the one larger trend. I therefore expected the rally would peter out in a purple wave 2 (or B) and herald a renewed decline in wave 3 (or C).

So, with the odds firmly suggesting a renewed decline, a short trade was indicated. This was my full analysis at the time on the 4-hr chart:

The rally carried to the Fibonacci 78% level on a small momentum divergence and when that level failed to hold, a short trade was made at the $360 area on 18 August with a protective stop at the $370 level.

If I had that right, I expected to see a rapid decline in a small third wave which would test the $300 level again. Here is the updated daily:

In fact, the market did not follow my roadmap at all and instead made a further push up to a slightly higher high in September! That little episode forced me back to the drawing board and I nursed a loss.

But now, I had a re-drawn (and more convincing) five-up and a renewed decline - and I had a nice momentum divergence at the new high. But because I had the amended waves 2 and 4 lows in place, I could now draw in a major blue trendline that connected the waves 2 and 4 lows - and importantly, extend it to the right. That line is a significant line of support, but when broken would become a line of resistance. This simple concept can provide traders with many accurate trades!

And when that line of support was broken on 23 October, I had another short trade working.

Again, I had an immediate target at around the $300 level, which was met last week with some overshoot. I also have a potential wedge forming where my main long-range target is the $240 area.

Interestingly, now the market is in decline, all sorts of negative news is emerging about the company - and not only the perennial production 'misses'. Norway is leading the world in electric vehicle (EV) sales (60% of sales last month), but now is proposing a 'Tesla tax' of about $10k per vehicle. Of course, this is robbing Peter to pay Paul since electric cars receive vast government subsidies that conventional ones do not. Already, sales of EVs in Denmark have slumped following tax changes there.

With the pressure on all governments to raise revenue, the days of massive tax subsidies are surely numbered. And the pressure is on Tesla. Rallies are there to be shorted and I expect a decent bounce from current levels.