Chart of the week: Will this tech trade deliver again?

Is Tesla coiling into a big swoon?

I last covered this in my 'Chart of the week' of 3 April and pinpointed a successful short trade.  But because this is a heavily shorted share, I am always on the lookout for temporary sharp rallies as nervous shorts are squeezed out of their positions.

Despite the lack of earnings and continued misses on production targets, hopes are being kept alive partly by Musk's star charisma and the seemingly unstoppable momentum of the electric vehicle (EV) revolution.  

•    Chart of the week: A short ride with Tesla shares

But slightly under the surface, the alternative – and much, much cleaner and greener hydrogen fuel cell technology - is making giant strides.  Could EVs lose out to hydrogen and, of course, devastate Tesla Inc's share price?

Back to 3 April – I had a short trade working using this chart:

Source: interactive investor      Past performance is not a guide to future performance

My pink trendline was a solid line of support until the break - and now resistance - and when the market rallied to kissed it in February, that was my signal to enter a low-risk short trade at the $360 area.  

It was low risk because I could set my protective buy stop just above the line, figuring any break above it would cancel out my immediately bearish scenario.

In fact, this is one of the major benefits of searching for these reliable trendlines – they allow the placing of a definite stop loss in case of error – little guesswork is involved, as is usually the case.

And right on cue and true to my roadmap, after that trade the market bounced heavily off the kiss in what I call a Scalded Cat Bounce – named in honour of the famous Dead Cat Bounce of bear market fame.  

I have noted that when you have a genuine kiss on a long-standing line of support/resistance, the move away from it is likely to be explosive – and so it proved here.

Here is the updated chart on the weekly:

Source: interactive investor      Past performance is not a guide to future performance

My original target was the $220 area but, since then, I amended this likely downside target after applying my Fibonacci levels, and also slightly moving my blue tramline to better fit the existing highs/lows.

My new target became the $260 area, and that was duly achieved in April where I took profits of $100 per share.  Not a bad return for a two-month trade.

And from that target, the market staged a strong recovery (in a short squeeze, perhaps?) and last week was back up to the $370 area to almost a new all-time high.  That was no time to be short!  And a justification of my approach to trade this share with great flexibility.  This is no time to be too dogmatic.

Here is my best guess for the upcoming moves:

Source: interactive investor      Past performance is not a guide to future performance

The rally off the kiss is wave 2 of what should be a large five-wave pattern down and the decline off it is a third wave, but I need to see a strong move lower to validate this scenario.

Any move to new highs above $380 would likely delay any major move lower in the near term.  But my major first objective is back to the wave 1 low at the $260 area.  Breaking that would set up lower objectives.

John Burford is the author of the definitive text on his trading method, Tramline Trading.