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Looked at objectively Tesla has a scary chart and is a key benchmark stock

October 7, 2022

Have I been hypnotised by Elon Musk? This chart is telling me that maybe I have. At the end of the day Tesla makes and distributes cars. Instead of engines they have batteries. As long as demand is strong that makes for great profit margins. It is easy to do well when demand outstrips supply but that is not a situation that ever lasts indefinitely in a capitalist economy. Supply will increase and demand will not always be so strong.

I suspect that if I was not listening to honeyed words from the master promoter, Musk, but just looking at this chart I would be worried. We are in a bear market. All the tall poppies are having their stems chopped off. Can Tesla buck the trend and what will this chart be telling us if he cannot. It is a key benchmark stock and measure of investor enthusiasm in this market. If Tesla breaks down that would be a significant blow to general sentiment. If it could break higher, which looks the less likely possibility presently, that would cheer us all up.

The pattern looks like a head and shoulders. The key thing to notice in a head and shoulders pattern is the neckline. If that gets broken, as Sir Alex Ferguson might say, it is serious squeaky bum time. I would put the neckline around $224. If the price breaks below that level and does it with serious volume and intent that will be scary.

Tesla could then prove to be like the emperor with no clothes and that would be another nail in the coffin of the bull market that ran from 2009 to 2021.

You can almost perceive this stock market as a battle between fundamentals and charts. If the fundamentals are exciting enough or can be presented as exciting enough which is the case with Tesla with its talk of robot taxis, actual robots and other ventures, then its huge crowd of devotees who own both cars and shares will attract yet more fans and that will tend towards a higher share price.

But in line with the tough macroeconomic background the stock market river is flowing downhill so the Tesla bulls are trying to paddle their boat against the current. If the fundamentals weaken suddenly the boat would be overwhelmed and the shares could fall sharply.

Opinions are divided on Tesla but most close observers are bullish based on the fundamentals. One analyst recently described Tesla as his highest conviction buy with 400pc upside based on such things as its lead in factory technology and the prospect of the business throwing off tons of cash. The problem is that this does not square with that scary chart. This is a share to watch and in the short run the safe strategy is to be out waiting to buy than the other way around.

It’s brutal out there. Look at QQQ3, the leveraged ETF which is currently my only shareholding. My brief flirtation with profits is a distant memory. So far in 2022 the shares are down from $270 to $64 and they are locked into a fierce downtrend.

It’s a bit like playing poker. If you have a great hand by all means bet the ranch. But if your hand is weak, fold it and wait for more favourable cards. It’s the bets that you don’t place that help you make money in the end – ‘know when to hold ’em, know when to fold ’em’ in the words of the Kenny Rogers song.

I’m not planning to fold my stake in QQQ3 but I am watching and waiting for an irresistible buying opportunity. These shares can fall 10pc in a day so they could go to wherever. When and if they do I will buy some more. This is not a strategy I would apply to Tesla shares. If they break down badly that would be more serious. QQQ3 broadly tracks the Nasdaq 100 index but does it on steroids; they have to bounce one day but individual shares can go down and never come up again.

Strategy

You are probably thinking I keep looking at the same shares all the time. I do but that is because these are shares that tell a crucial story. One day this stock market will turn higher but there is no sign of it yet. When it does that will be the time to start looking for new names in which to invest but in a bear market nobody wants to IPO their shares and new shares aren’t emerging because so few shares are emerging. All we are seeing is the stars of the old bull market unravelling and on the basis of the rule – when they raid the brothels they take all the girls – the odds are against Tesla bucking the trend indefinitely.

We can see below the Nasdaq 100 is fighting hard against falling further but it is slowly being ground down and may go significantly lower before this bear market is finally over.

Bitcoin is putting up a fight around $20,000. This is creating a key area of consolidation. The resistance does not really tell us that it won’t break down. It is more that the longer it lasts the more significant will be the breakdown when it comes. It turns out that $20,000 is a very key level indeed, like the inner stockade of a fort. As I write these words the level was exactly $20,000. If it fails to hold and the price breaks down, which again is the more likely development given the general background and the shape of the chart, the price could go a lot lower.

Let’s forget about the charts for a moment and think about the fundamentals. Imagine that the world economy is a sick patient. The symptoms are inflation. The remedy is higher interest rates. As investors we need to see that the remedy is working and that the patient does not need a higher dose. It doesn’t look as though we have reached that stage yet but when we do, perhaps sometime next spring, we could see fundamentals and charts pointing in the same direction. The patient is past the worst and the charts are starting to turn higher. This is what I mean when I talk about common sense as being helpful in understanding stock market trends.

Professor Minford thinks three per cent minimum lending rate will do the trick against 2.25pc currently. This is very possible because things like mortgage rates will be higher and are already having a sharp impact on the housing market.

Meanwhile the £/$ rate is trying to find a level. I don’t know what that level will be but it looks like being significantly lower than levels we have been used to. A weaker pound does not mean that the UK economy is less virile than it was, though actually it is, which is why we need Trussonomics or something like it. It just means that the previous rate was too high. It is quite a crafty thing to do, up to a point, because it means the real, inflation adjusted, cost of repaying the loans becomes less. Over time all loans become less onerous against a background of inflation but servicing costs go up which is what is hurting people currently.

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