TSLA Downside Risk Exists

March 18, 2014, 09:45 am ET, BY Thomas H. Kee Jr- Editor, Stock Traders Daily| Editor: Thomas H. Kee Jr. (Follow on LinkedIn)

Most of the time, traders want to see defined trading channels when they make buy or sell decisions, but when stocks gyrate as much as Tesla (NASDAQ:TSLA) has recently otherwise disciplined traders sometimes find themselves making very bad decisions.  Reasonably, it is difficult to trade TSLA based on news because one day the news is negative, the next it is not, but anyone trading based on news might also be distracted to such a degree as to dig themselves a hole.  The stock is trading at 375 times trailing EPS, and with news and valuation risk, stocks with P/Es like this move all over the place.  In my opinion, there is a better way to approach TSLA.

In my neck of the woods, Teslas are everywhere, and the people that own them love them.  From a product-only perspective Tesla definitely did something right and I think the innovation is right up there with the smart phone revolution attributed to Apple (NASDAQ:AAPL).

However, as newer investors in Apple will tell you, innovation only takes you so far, consumers are fickle, and eventually valuation matters again.  Tesla might have similarities to Apple as mentioned above, but those similarities extend beyond the innovations.

In addition, investors in Tesla today sound very similar to investors in Apple in 2012, but there is a big difference.  The difference is the target market, which is defined largely by the price point.  Almost anyone can buy, or save a little money and then buy an iPhone.  That makes it a trend the masses can follow, so with the innovation came scalability.

Tesla, although very capable of growing, is very unlikely to be scalable like Apple was.  I would say that Tesla would never be able to do what Apple did, but I do not want to put anything past Elon Musk.  In keeping with the comparison, thus far he is in the same league as Steve Jobs.

Above I have offered praise, and caution, but what really makes investors money is price.  In order to make money in a stock you must pay attention to its price, and to that regard specifically, Tesla has recently tested longer term resistance as that is defined in our real time trading report for TSLA, and as a result, by rule and definition, we should expect it to decline to test support.

When Tesla tested that resistance level it was a sell/short for traders, and I understand that there are also many investors who do not wish to trade their shares, but for those investors who are not in TSLA, this observation also tells you to wait until longer term support is tested (check the report).

Right now, TSLA is an avoid, based on price, but given the gyrations associated with news that could change.  Based on trailing 12 months earnings, TSLA has a P/E of 375 times earnings, and stocks with multiples like this, and as news driven as this, tend to move erratically.  The stock could trigger again in the next few days given the right news, but we consider TSLA to be in the middle of a trading channel right now, and therefore there are no compelling reasons to initiate new trades.  The stock does appear most likely to decline from recent tests of longer term resistance towards longer term support though, so a downside bias has been defined.

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