Tesla (NASDAQ:) shares fell to $966.41 on Monday, closing 5% on the day. That move didn't just push the stock below the psychological, round level of $1,000. It was also part of a larger price move for TSLA.
At the close, the stock had completed a 21.42% retracement from its November 4 record of $1,230, officially entering a bear market.
The timing for one of the world's most notable and closely monitored stocks to descend into a bear market is rather ironic. The move came just as Time magazine named Tesla founder and CEO Elon Musk its Person of the Year. You could say that traders bought the rumor and sold it on the news.
However, there is a more concrete reason for the sale. News came yesterday that Musk has redeemed an additional $906.5 million in shares of the company and exercised options to buy 2.1 million shares at a significantly lower strike price.
The increase in supply caused the price to fall, as did investor sentiment, which dislikes owners selling large blocks of shares. However, from a technical standpoint, entering a bear market is just an arbitrary benchmark. For them, it is the patterns formed by the price action that tell a more complete story.
TSLA has completed a peak-and-trough downward trend. However, purists would wait for a few more highs and lows to provide a bearish series of highs and lows independent of the uptrend. The first peak of the chart we show cannibalize the final high of the preceding uptrend.
Nevertheless, tougher technical analysts can be appeased by the Descending Triangle, accepting the bearish outlook after the price breached the 50 DMA, also completed yesterday. Finally, Tesla is still trading well above its 200 DMA.
The last time this happened, when it peaked in late January, the price then fell back toward the long-term moving average. If that happens again, expect another 20% drop. the shares.
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Moderate traders would wait for price to successfully retest the triangle.
Aggressive traders can short at will, provided they accept the higher risk relative to the higher reward of moving ahead of the rest of the market. Money management is key. Here's an example showing the basics of a coherent plan:
Trading Example – Aggressive Short Position
Entry: $975
Stop Loss: $1,000
Risk: $25
Target: $875
Reward: $100
Risk Reward Ratio: 1:4
