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Tesla: Short Squeeze or Drive of A Lifetime

Lawrence Lewitinn
Talking Numbers
Tesla: Short Squeeze or Drive of A Lifetime

Is Tesla the greatest automotive company in the world or the greatest short squeeze of all time?

Shares of electric car maker Tesla Motors are up over 5% today. The company announced that it will be raising $830 million. More than half of that will go to paying back US taxpayer for its loan to the company. Chairman and CEO Elon Musk will put in $100 million of his own cash himself.

That’s a lot of money but it’s a fraction of Tesla’s current market value of $10.7 billion.

Tesla has had some traction in the luxury market. It’s starting price of $70,000 has made the American car-maker a status symbol for the wealthy. The company’s Model S sold more than the Mercedes S-Class and the BMW 7 series combined. The company plans expects to sell 21,000 cars this year.

But is Tesla a dynamo or will its stock run out of gas?

The charts suggest share prices will go an alternate direction from its current run-up, according to Abigail Doolittle, Technical Strategist at The Seaport Group and Talking Numbers contributor.

“It really presents a perfect picture of a mania or a bubble popping at this point,” says Doolittle.

From March until the beginning of May, prices followed an upwards-sloping trend line. Then, starting after the first week of May, shares fired in an even steeper uptrend, trading over $97 only to work its way down.

“The parabolic uptrend is bearish,” says Doolittle. “It suggests panic selling may take hold soon as shares consolidate to the more reasonable uptrend from March.”

“It cannot hold. Think about silver. Think about Apple. Think about gold. That’s what we’re looking at with Tesla.” Doolittle thinks the stock can even make its way to $40.

Steve Cortes, founder at Veracruz TJM believes there’s a “massive, historic short squeeze” occurring in the stock.

Tesla has a short interest of about 44% of its stock. In order to short the stock, an investor must first borrow shares and sell it. At a later date, they are required to buy it back. When too many short sellers buy back a stock at the same price, the price goes up as they all buy up scarce shares.

Cortes has high praise for Tesla’s CEO. “Elon Musk is a person you want to bet on. He was a winner in PayPal. Not only is he not selling [shares], he’s borrowing money to buy more.”

That and its prospects in Europe are making Cortes think there’s a fundamental shift in the company.

“I love Tesla the stock almost as much as I love Tesla the band back in the ‘80s and ‘90s. And that’s saying something.”