The Bottom Falls Out of Tesla: Is This Momo Stock Broken?

Tesla Motors TSLA shares fell the most since January 13, 2012 on the highest volume since May today. The move is being attributed to a bearish note from Goldman Sachs on Tesla.

Despite this, the stock is still up nearly 150 percent year-to-date and Tesla bulls are defending the move as a needed correction. So, is this the breaking of a momentum stock as infamous as any or is this just the latest in a string of great entry points.

Too Musky?

Tesla shares rose to a new record high of $133.80 pre-market Monday on news that CEO and Founder Elon Musk was set to lay out plans for his next great project, the Hyperloop. However, shares sold off on the day and closed near the lows, a bearish signal.

Today, the stock has fallen as much as 18.83 percent from the pre-market high Monday with the sell-off accelerating after lunch before the stock finding a base around $110, on some solid technical support. However, the stock has sold off on very strong volume in a sign that conviction is building for lower, not higher prices.

The Bernanke Effect

Traders who are short might consider using this sell-off as an opportunity to cover and those looking to short might be best waiting for higher prices here as a correction higher is due. The RSI on the daily chart is not quite in oversold territory (below 30) but at 38.51 it is indicating a higher chance of a move higher rather than lower. And besides, the famous beard is set to speak tomorrow.

That's right: Bernanke is back tomorrow for a double dose as he begins his two-day semi-annual testimony on Capitol Hill. The last time he spoke, stocks rallied sharply to new record highs. Therefore, being short ahead of the beard might be risky.

To avoid a massive short-covering rally sparked by Bernanke, traders might want to stay out of the stock and use any strength as an opportunity to go short, or less aggressively sell upside calls. Other strategies to consider include buying a put spread on the downside and also buying a put spread while selling a call to minimize premium spent and to add to the bearish bet.

Broken Uptrend

The catalyst for the latest leg lower that saw the stock drop as low as $108.61 was the break below the uptrend that had been key support for the stock since it took off from below $60 per share. Now, the stock has seemed to form a base with a double bottom but is re-testing and so far unsuccessfully trying to break back above the key $111 now. If it closes below this level, that would be very bearish as it would be the first time the stock closed below the trend since March.