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How we know that Tesla, Inc. (NASDAQ:TSLA) is a bubble that is going to pop

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How we know that Tesla, Inc. (NASDAQ:TSLA) is a bubble that is going to pop

It hardly seems newsworthy to report that Tesla’s stock is in a bubble.

After all, it has more than quadrupled since last summer, and short sellers have been insisting ever since that a bubble is forming.

But what is newsworthy is that Tesla’s TSLA, -0.12% stock runup in recent days has now satisfied an objective criteria of a bubble that is about to burst. The probability of a crash is now more than 80%, according to that model.

This model was published last year in the Journal of Financial Economics by Robin Greenwood, a finance and banking professor at Harvard Business School and chair of its behavioral finance and financial stability project; Andrei Shleifer, an economics professor at Harvard University; and Yang You, a Ph.D. candidate at that institution.

To be sure, bubbles — and the crashes that follow when they burst — are rarely defined by the armchair pundits who like to throw around these terms with abandon. The Harvard researchers employ the following definitions: A bubble is a sharp price run-up over a two-year followed by at least a 40% drop over the subsequent two years.

The probability of that 40% or more price drop rises as a function of the magnitude of the prior two-year return. When the price run-up is 100% or more, they found the probability of a crash becomes 50%. When the price run-up is at least 150%, that probability becomes 80%, and as price run-ups become even bigger, a crash becomes “nearly certain.”

These probabilities are summarized in the table below. To put them in context, consider that Tesla’s stock has produced a trailing two-year gain of 162%. Tesla’s gain relative to that of the S&P 500 Automobile Manufacturers Index SP500.25102010, -1.90% has been even higher, at 209%.

Price run-up over prior two yearsProbability of a drop of at least 40% over subsequent two years
50%20%
75%36%
100%53%
125%76%
150%80%

The odds are even worse than this table suggests, furthermore, given several other factors that the Harvard researchers found to increase the odds of a crash. One is acceleration, defined as how much of the trailing two-year return came most recently. This clearly is a factor for Tesla, since it’s only been in recent weeks that its stock has gone parabolic.

Another factor increasing the odds of a crash is an inflated price/earnings ratio. This also applies to Tesla, of course, since it currently doesn’t even have a P/E, given that it lost money over the last 12 months. Its forward-looking P/E, based on estimated earnings per share over the next 12 months, is 85.7, according to FactSet — more than four times higher than for the S&P 500 SPX, -0.54%  .

Note carefully that the Harvard researchers’ model is not a commentary about Tesla as a company or its mission. Their model instead is solely based on past price performance.

Tesla’s true believers no doubt will insist that the history on which the researchers based their model doesn’t apply. They will tell a story that in essence boils down to the claim that there has been no company like Tesla before.

Technical Indicators

Overall, the bias in prices is: Upwards.

Note: this chart shows extraordinary price action to the upside.

By the way, prices are vulnerable to a correction towards 542.78.

The projected upper bound is: 860.17.

The projected lower bound is: 652.44.

The projected closing price is: 756.30.

Candlesticks

A white body occurred (because prices closed higher than they opened).
During the past 10 bars, there have been 8 white candles and 2 black candles for a net of 6 white candles. During the past 50 bars, there have been 33 white candles and 16 black candles for a net of 17 white candles.

Momentum Indicators

Momentum is a general term used to describe the speed at which prices move over a given time period. Generally, changes in momentum tend to lead to changes in prices. This expert shows the current values of four popular momentum indicators.

Stochastic Oscillator

One method of interpreting the Stochastic Oscillator is looking for overbought areas (above 80) and oversold areas (below 20). The Stochastic Oscillator is 31.3034. This is not an overbought or oversold reading. The last signal was a sell 2 period(s) ago.

Relative Strength Index (RSI)

The RSI shows overbought (above 70) and oversold (below 30) areas. The current value of the RSI is 67.23. This is not a topping or bottoming area. A buy or sell signal is generated when the RSI moves out of an overbought/oversold area. The last signal was a sell 2 period(s) ago.

Commodity Channel Index (CCI)

The CCI shows overbought (above 100) and oversold (below -100) areas. The current value of the CCI is 71. This is not a topping or bottoming area. The last signal was a sell 1 period(s) ago.

MACD

The Moving Average Convergence/Divergence indicator (MACD) gives signals when it crosses its 9 period signal line. The last signal was a buy 38 period(s) ago.

Rex Takasugi – TD Profile

TESLA INC closed down -0.890 at 748.070. Volume was 26% above average (neutral) and Bollinger Bands were 272% wider than normal.

Open     High      Low     Close     Volume___
730.550 769.750 730.000 748.070 17,063,520
Technical Outlook 
Short Term: Neutral
Intermediate Term: Bullish
Long Term: Bullish
Moving Averages: 10-period     50-period     200-period
Close: 689.61 478.45 304.63
Volatility: 180 93 72
Volume: 30,187,854 16,904,422 11,301,220

Short-term traders should pay closer attention to buy/sell arrows while intermediate/long-term traders should place greater emphasis on the Bullish or Bearish trend reflected in the lower ribbon.

Summary

TESLA INC is currently 145.6% above its 200-period moving average and is in an upward trend. Volatility is extremely high when compared to the average volatility over the last 10 periods. There is a good possibility that volatility will decrease and prices will stabilize in the near term. Our volume indicators reflect volume flowing into and out of TSLA.O at a relatively equal pace (neutral). Our trend forecasting oscillators are currently bullish on TSLA.O and have had this outlook for the last 35 periods.

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