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Bull & Bear Trading

About the Author Bull & Bear Trading

A former stockbroker who became licensed in 1986. Later opened a small hedge fund and managed a modest amount of assets during the 1990s tech boom. Our marketplace resource is called Trader's Idea Flow that provides several actionable ideas monthly. These trading ideas are both long and short from the broader market. We also provide some trading ideas / coverage on cryptocurrencies and blockchain technology.

Here’s Why We Shorted Tesla (TSLA) Stock


Trader’s Idea Flow posted this article on 6/12/18 regarding our belief that Tesla’s (NASDAQ:TSLA) CEO Musk could very well engineer his promised short squeeze to lift the price of the stock. We stated at that time we would become interested in seeking an entry point for a short sale in shares of TSLA.

To be clear, we are a very big fan of Tesla as a company and the promise it holds for innovation and seminal change in the direction of technology for the auto, battery storage, and energy industries. While we love Tesla the company, we are not enamored of its increasingly erratic and mercurial CEO Musk. Tesla the company may have a much brighter future without Musk and our interest is in the success of Tesla the company. However, we believe that the current valuation for the company’s shares is too high.

We are not focused on the issue of whether a buyout for the company will eventually occur to take it private. A buyout may or may not occur and surprisingly, this is not our concern. Experience has shown us that even if such a deal for Tesla to be taken private were to become reality, then it will take a significant amount of time. In the mean time, the stock is likely to remain volatile and after this initial flurry of excitement that is now underway, then markets are likely to focus on the many complications that lie ahead for any such deal. We must also consider the possibility that there is no such deal in the works whatsoever. In either case, our short trade should be successful from the current entry point.

Simply put, we are bullish on Tesla the company but we feel that the stock price is now far too high. Accordingly, we have used the chart to seek our entry point for this short sale of TSLA shares on August 8.

We look for the breakout failure pattern combined with decreasing volume for initiating our short sale. We saw a lower high as hourly volume has begun to decline. This has signaled our entry point for our current short sale of TSLA shares. The chart below is more specific to recent daily price action:

Summary:

The chart has indicated initial enthusiasm and short covering in the price action of TSLA shares due to Musk’s tweet regarding “consideration” of taking the company private. This has been followed by skepticism in the markets who have correctly recognized the long history of inaccurate statements issued by the individual currently acting as CEO of Tesla. We believe this price spike in the shares of TSLA present an excellent opportunity for a short sale trade.

Our catalysts for the short sale to succeed are as follows:

  • A leveraged buyout of this size would require a significant amount of time to even organize and get underway, much less complete. Generally, there are moments of “doubt and pain” along the way for these deals when the stock would likely decline sharply in price. This would give traders the opportunity to take profits on their short sale;
  • Musk’s credibility has long been a question mark. There may not be any such deal whatsoever in the works to take shares of TSLA private. Candidly, the bizarre conduct of Musk in the previous quarterly conference call and also during the rescue mission of the Thai soccer players indicates this individual may no longer be the correct individual to act as CEO of this publicly traded company. Certainly, the realization that Musk was just being Musk once again would give traders the opportunity to take profits on their short sale;
  • Elon may have finally “jumped the shark” one too many times. He has clearly opened himself up for at the very least an SEC inquiry. The government does not have to bring any charges or even launch an investigation for our short sale to work successfully. We only need to see the SEC make an inquiry into any item of business at Tesla for the stock to likely plummet sharply. An SEC inquiry would not be uncommon in such a high profile and unusual situation that has been created by Musk. Any such inquiry would negatively impact the shares of TSLA on speculation that an inquiry would precede an investigation, which could result in charges and a prosecution;
  • And finally, we believe that there are a substantial number of fundamental issues that are troubling Tesla. These fundamental issues are always a valid threat to the current valuation of Tesla shares.

Conclusion

We love Tesla the company, look forward to the day that the company replaces Musk (easier said than done of course), and we believe that the romance phase for this stock is now ending and that reality tells us this stock is way overvalued. This is our first short sale of TSLA shares ever. Now may be the time for a successful trade lower at least. The chance for other issues to complicate the bull case at Tesla now exist and this could increase the profitability of our short sale. We like the risk/reward ratio for the short sale of TSLA shares at this level.

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Disclaimer: The author has a short position in TSLA. The author is not receiving compensation for this article. This article is intended for informational and entertainment use only, and should not be construed as professional investment advice.

 

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