The Balsa Wood Festival (TSLA,GFI,AU)
When I was a kid, it was all the rage to build balsa wood gliders and send them sailing down the 70 foot drop at Dead Man’s Hill in Eglinton Park. The things never lasted more than four or five trips; they were balsa wood, after all.
But watching them soar was a thrill. And if the winds were just so, and the balance and design were good, those contraptions were for us an awe and a wonder on par with the ten plagues.
The crash-ups were equally exquisite.
Those golden moments of silence when my buddies and I waited for our aircraft to finally touch down were the most breathtaking of my entire childhood. The anticipation. The hope. The subsequent speedy and dangerous descent to ascertain the damage, and the knee-slapping, ground-roll guffaws that followed. Childhood Nirvana…
Funny. Now, as an adult, I feel I’m reliving those days watching the NASDAQ.
There have yet to be any wild crashes – at least not among the leaders – though some appear to be headed in that direction.
Could be that shortly we’ll be grabbing our popcorn and melting a stick of butter.
Among those that appear to be headed toward a gleeful crash is electric hype producer auto maker, Tesla (NASDAQ:TSLA), a stock that’s given up 25% of its value over the last half year and that’s getting almost as much bad press as Facebook.
The bad news is coming fast and furious, and the shares look to be headed for a hard balsa landing, but before we actually trade the lightweight MuskMobile, let’s have a gander at an open trade.
We start with an initiative that was launched on December 14th in a letter called The Crypto-Reformation. There, we urged you to consider a long/short effort on two gold producers, purchasing the GFI July 20th 4 CALL for $0.40 and selling the AU July 20th $11.00 CALL for $0.40. Zero premium was the result.
As we wrote at the time, GFI was a much better performer when gold bullion was on the rise. Yet, even though bullion has been climbing strongly for almost three weeks, and even though the shares of both stocks have moved precisely in the manner we would have liked, the options haven’t responded at all.
Today the GFIs go for $0.50 and the AUs for $0.45. And we say take it.
Yes, there’s still a good bit of time left before expiry, but we’d rather escape clean than take a loss. Sell off the former and buy back the latter and you come home with a nickel on nothing spent. Call it a wash.
And Now To Our Tesla Play…
We’re going to open with a little info on Tesla’s woes.
- The outflow of company executives continues apace, with the firm’s VP of Finance and Chief Accounting Officer being the latest to sign out. Last month, the company’s President of Global Sales jumped ship. The latest round of departures comes after a similar spate just over a year ago that saw founders and, yes! even relatives, haul off and quit.
All told, better than 50 executive positions have been abandoned in the last couple of years as the company’s cash burn has scorched the highest ranks and reports of increasing numbers of ‘flawed vehicles’ abound.
- Perhaps that’s what led Goldman Sachs to issue a SELL rating on the stock with their latest analyst report. Citing production problems and the likelihood of declining YoY deliveries, Goldman offers a $205 price target for the shares! And we would add that SELL ratings on Wall Street are almost unheard of. This is a significant development.
- Bad credit position. Tesla’s 5.3% 15 Aug 2025 bond offering has been so heavily shorted that no inventory remains to be borrowed! More than that, it appears that despite the drop in price, no one is yet covering. There’s a widespread belief among traders that the company will not be able to find cash to pay bondholders.
- Lastly, the National Transportation Safety Board (NTSB) has launched an investigation into the company after a series of high profile crashes have raised questions regarding the overall safety of the vehicle and its ‘autopilot’ function. Just last week in Mountain View California, a man was killed after his Tesla Model X crashed and blew into flames on highway 101.
Now have a look at the chart –
The salient technical issues are as follows:
- First, we’re in the midst of a waterfall decline that has broken below former support at $295 on gathering volume.
- Second, three of the stock’s most important moving averages are a week from rolling over, a development that would put a fairly strong cap on the stock at roughly $325 (in blue).
- Third, price action sliced through the long term moving average like a branding iron through butter.
The only hope from the daily chart is that Tesla drops into oversold RSI territory (in green, at bottom), a move that would encourage more buyers to step into the fray.
Have a look now at the weekly chart –
The takeaway from the weekly chart is that strong support at the 137 week moving average has been hit (upper black arrow), a level that generally corresponds to a bounce – or, at least, a pause in selling.
If it fails, the next line of support would be at the 274 week MA, now at $225 and rising (second arrow).
It was inevitable that the selling would come; after last June’s weekly RSI overbought read (that coincided with a double top on the shares), we were expecting a decline.
And now that we’ve come this far, and implied volatility is soaring, we believe the most logical trade is to sell premium.
So that’s what we’re doing.- Content protected for Normandy Executive Lounge, Option Trader Elite, Executive Lounge members only]
Upside breakeven is $307.40.
Downside breakeven is $202.60.
Current price is $257.78.
Many happy returns,