In my previous update (see here), when Tesla (NASDAQ:) was trading at ~$410, my preferred view was, based on the Elliott Wave Principle (EWP) technical analysis, and the technical indicators, “As long as this week’s high is not exceeded, I prefer to look lower, knowing there will likely be several twists and turns along the way down.” And that “black, major, wave-3 topped, and major wave-4 is now under way …. [which] should ideally fall back to around $280-340 before wave-5 kicks in. A loss of the $270 level will be a severe warning Tesla has put in a much larger top.”
One week later, and the stock is trading at around $365—a loss of 11% since my update on Sept. 3. Thus looking for lower prices was indeed correct. If one had bought Tesla on Aug. 31 at the open, when it started trading at its new split-adjusted share price, one would now be down almost 20% if one had no stop loss in place. Thus, the rally before the stock-split was as many would call a “buy the rumor, sell the news” type of event. In EWP terms, it was a fifth wave.
What’s next for Tesla? Corrections are always the most tricky to correctly forecast as they can take on many forms: triangle, zigzag, flat. See here for a basic explanation. The backbone is three waves: a, b, c. Corrections can always become more complex with seven or nine, etc. waves. It is impossible to know beforehand, which form the correction will take and how many waves it will do. Still, once the initial move down has completed, as it has now, I can give a more reliable forecast of what to expect next.
My expectation is for Tesla to complete a larger (Red) wave-a in the orange target zone (~$275-325), rally back to resistance (~$450) for wave-b and then a final wave-c back down to $280-340 to complete wave-4. See blue arrows. Shorter-term Tesla can take a little detour first, by rallying to around $410, and then drop to the red wave-a target zone. See green arrows. It is at this stage unknown which exact path will be taken. When things are uncertain, I recommend staying out. But that’s just me.
As you can see, I placed an alternate EWP count on the chart as well (black alt: 3, 4, 5). This option comes into play if the stock moves below the wave-1 high at $193.80. In that case, Tesla will see a much deeper correction, back to the low $100s once again (red arrow). The first warning of this possibility will be on a close below lower support at $260.
Instead of thinking that this alternate option is only confusing, it provides us with an excellent trading strategy: one can use these price levels as stop losses when entering a long position in the ideal wave-4 target zone. Depending on how aggressive a trader/investor one is, there’s thus a well-defined downside risk and upside reward. No need to use arbitrary 5% or 10% stop losses, which the algos are programmed to sniff out.
While there is still plenty of time and price action left before this stock should ideally bottom for wave-4, I can continue to monitor its progress and use that to my advantage to fine-tune lower and upper price targets as well as stop-loss levels. This is the advantage of the EWP: it helps me to plan the trade and trade the plan. No sweat. I can advise you should do the same.