Is It Game Over for Tesla?

Tesla's stock has experienced a dramatic decline since December 2024, plummeting over 50% and wiping out more than $700 billion in market capitalization. Eight consecutive weeks of losses have left many investors wondering what's next for this former market darling.

In this comprehensive analysis, I'll walk you through my process for evaluating a stock using both technical and fundamental analysis.

By using Tesla as our case study, you'll learn a systematic approach that you can apply to any stock in your portfolio.

Step 1: Understand the Market Context

Before diving into specific indicators, it's important to understand the broader context affecting the stock. For Tesla, several factors have contributed to its decline:

• Product Issues: A recall of over 46,000 Cybertrucks affecting almost every Cybertruck on the road

• Consumer Behavior Shift: Record numbers of Tesla EVs being traded in according to Edmunds data

• Declining Growth Projections: Q1 2025 vehicle deliveries projected to be at their lowest level in three years

• Increasing Competition: Chinese manufacturers like BYD offering more affordable and technologically advanced models

• Leadership Controversies: Elon Musk's political activities potentially alienating a portion of Tesla's customer base

Analysis Tip: Basically hype can drive a stock up even if the fundamentals are poor. Bad news can drive a stock price down, even if fundamentals are great!

Step 2: Examine Fundamental Indicators

Next, let's look at the fundamental metrics that show us the company's financial health.

Earnings Growth

For growth stocks like Tesla, earnings growth is a critical metric. Here's what to look for:

• Benchmark: For a high-priced growth stock, we want to see earnings growth of 40%+ over the last four quarters. Ideally accelerating growth

• Tesla's Reality: The company is showing decelerating earnings growth

• Warning Sign: Growth companies are priced mostly based on their promises on the future. If the future is bleak, you know what to expect…

Return on Equity (ROE)

Return on equity tells us how efficiently a company is using shareholders' investments to generate profits:

• Benchmark: Look for an ROE above 17% for high-quality companies

• Tesla's Reality: Currently showing an ROE of only about 10%

• Interpretation: This suggests Tesla is not generating sufficient returns relative to its valuation

Analysis Tip: When a company's stock price is primarily supported by future projections (like Tesla's full self-driving technology and robots) rather than current fundamentals, it's especially vulnerable to sentiment shifts.

Step 3: Apply Technical Analysis Tools

Now, let's study the charts to identify patterns and signals. For Tesla, I use both weekly and daily charts to get a complete picture.

Chart Setup

• Weekly Chart: Include 10-week and 30-week simple moving averages for long-term trend identification

• Daily Chart: Use 20-day exponential moving average and 50-day simple moving average for short-term moves

• Additional Data: Include volume indicators and earnings tables for context

Volume Analysis

Volume tells us the conviction behind price movements:

• Tesla's Volume Pattern: Red candles (down days) show significantly higher volume than green candles

• Interpretation: More people are actively selling than buying, indicating strong downward pressure

Moving Average Crossovers

Moving average crossovers can signal major trend changes:

• Critical Signal: The 10-week simple moving average is approaching a crossover below the 30-week simple moving average

• Historical Impact: This bearish signal has preceded major Tesla selloffs in the past

  • February 2019: 45% drop following crossover

  • Later period: 65% total drop

  • 2023: Approximately 40% drop from crossover point

Analysis Tip: Back-testing signals on the same stock gives you confidence in their predictive value for that specific security.

Step 4: Forecast Potential Price Targets

Based on technical signals and historical patterns, we can make educated projections about potential price targets.

Moving Average Crossover Projection

• Crossover Point: Around $319 for Tesla

• Historical Context: Previous crossovers led to 40-65% drops

• Projection: If we see a similar 60% drop from the crossover point, Tesla could fall to around $100 per share

Post-Crossover Behavior Pattern

Stocks rarely move in straight lines. Understanding the typical pattern after a signal can help you anticipate short-term movements:

• Typical Pattern: After a bearish crossover, stocks often bounce briefly as short-sellers take profits.

• False Recovery: This bounce often tricks investors into thinking the stock is recovering. Also no one goes back to the road immediately after being hit by a truc. They need recovery time.

• Continuation: The primary downtrend typically resumes after this brief relief rally

Step 5: Apply Advanced Technical Analysis (Elliott Wave Theory)

For deeper analysis, we can look at specific technical patterns like Elliott Wave formations:

• Expanded Flat Pattern: Tesla appears to be forming what's known as an "expanded flat" in Elliott Wave analysis

  • Wave A: Initial downward move

  • Wave B: Bounce above the starting point of Wave A

  • Wave C: Final move down, typically below Wave A's low

• Projection: If this pattern completes as expected, it further supports the thesis that Tesla could reach the $100 range

Analysis Tip: No single technical pattern is infallible. The more confirming signals you can find across different analysis methods, the stronger your thesis becomes.

Step 6: Formulate a Trading Strategy

Based on our analysis, we can develop a clear strategy:

For Non-Shareholders:

• Avoid buying at current levels

• Watch for a potential shorting opportunity when the price tests the moving averages after a bounce

For Current Shareholders:

• Consider reducing position size now

• If we see a temporary bounce, use it as an opportunity to further reduce exposure

• Implement strict stop-losses to protect against further downside

Conclusion: Key Lessons From This Analysis

This Tesla case study demonstrates several important principles of stock analysis:

1. Integrate Multiple Approaches: Combining fundamental and technical analysis provides a more complete picture

2. Look for Confirming Signals: The most reliable trading signals are those supported by multiple indicators

3. Study Historical Patterns: Past behavior of a stock often provides clues to future movements

4. Understand Market Psychology: Anticipating how other market participants will react can help you stay ahead of the crowd

5. Develop Clear Action Steps: Your analysis should always lead to specific, actionable trading decisions

Remember that stock analysis is both an art and a science. The process outlined here gives you a framework, but developing your own judgment through experience is equally important.

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Regards,
Valentine