Signals Say Bumpy Road Ahead of Tesla Stock

TSLA formed a death cross earlier in July

Managing Editor
Aug 6, 2021 at 8:00 AM
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One of the more ominous technical indicators that we utilize as traders is the aptly named "death cross." Often seen as a precursor of negative or muted price action, a death cross occurs when a short-term moving average –usually the 50-day trendline – crosses below a longer-term moving average – often the 200-day trendline. Per Investopedia, a death cross has preceded the most severe bear markets of the past century, including 1929, 1938, 1974, and 2008.

More recently, Bitcoin (BTC) flashed a death cross in June before its sharp selloff. That's why Tesla Inc (NASDAQ:TSLA), one of the original "meme stocks," forming a death cross earlier this month is worthy of closer examination.

Per Schaeffer's Senior Quantitative Analyst Rocky White, we were able to collect the other times TSLA has formed a death cross, and what the returns going forward were. Per the table below, TSLA has formed 10 death crosses, including the most recent one on July 9. Looking at the other nine, the stock averaged a daily return of -1% a month later. Three months later, the returns are essentially flat. Interestingly enough, six months later Tesla sported an average return of 11.7%.

TSLA Death Cross

You can extrapolate the details of this table for forever. How much stock do you put in TSLA's absurd price action in the last 24 months, and do they qualify as possible outliers? Tesla has a Jekyll & Hyde history when you compare its first nine years publicly traded compared to the last two. What's perhaps the most prudent takeaway is that choppy price action from the once unstoppable equity could be the new normal this summer.

One "post" of this death cross is more important than the other, at least in Tesla's case. The 200-day moving average has been integral to TSLA since 2018, around the start of the trade war with China. Per the chart below supplied by Senior Market Strategist Chris Prybal, the 200-Day had been magnetic until the fourth quarter of 2019, it then became a springboard. Now, it seems those magnets are acting up again.


On Tuesday, July 27, Tesla stock closed below its earnings day opening price for the third-straight quarter. Despite the 135% year-over-year lead, the stock is still battling its year-to-date breakeven level. Its market cap sits at $665 billion, pulling back from its 12/31 levels of $705.67 billion. All of this is to say the technical hurdles are piling up. And while 200-day went from magnet to springboard awfully quickly in 2019, are similar macro tailwinds in place now that could replicate such price action? It's difficult to tell.

One thing is certain; implied volatilities have leveled off since Tesla stock was added to the S&P 500 Index (SPX) on Dec. 21. The equity's 30-day at-the-money (ATM) implied volatility (IV) of 46.3% is in the 1st percentile of its annual range, pointing to relatively deflated volatility expectations being priced into near-term options. Meanwhile, its 30-day ATM IV skew of 8.7% sits in the 61st percentile of its annual range. Plus, the stock's Schaeffer's Volatility Scorecard (SVS) sits at a high 96 out of 100, indicating it has exceeded options traders' volatility expectations in the past year -- a boon for potential options buyers.

Subscribers to Bernie Schaeffer's Chart of the Week received this commentary on Sunday, August 1.


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