To The Moon

Why is $Tesla Motors(TSLA)$  struggling and what I will do?

Before we talk about technical analysis, we need to understand the fundamental challenges that Tesla is facing in China. Why is the China market so important you may ask? Because the Chinese market accounts for more than half (58.7%) of the global EV market in 2022 and whoever owns this market will have an advantage to dominate the growing industry.

Right now, the one who is dominating is BYD (Build Your Dreams) who jumped from 13th spot in 2021 to top spot in 2022 with 1.86 million cars (EV & PHEV combined) sold and that is half a million more than what Tesla sold in 2022. Have I mentioned BYD is backed by Warren Buffett? Now you may wonder what is the difference between EV & PHEV?

PHEVs are "Plug-in Hybrid EV" which uses both an electric motor and a gasoline engine and PHEVs can be charged from an external source. PHEV is a next-generation eco-car that greatly extends the distance that can be driven only by electricity. In the unlikely event that the battery runs out, the ability to run the engine on gasoline will dispel concerns about electric vehicles. And why is PHEV important?

Just look at China's EV sales volume in Feb 2023. 2 of the top 3 models are dominated by BYD's PHEVs. The no.2 Wuling HongGuang Mini EV is a MINI EV which costs about 1/10 of Tesla Model 3. So what can we tell from this sales chart?

1) Price sensitive

- Tesla Model 3 is the cheapest model in Tesla's lineup and it is about the same price as BYD Seal which is BYD's most expensive model so it is not surprised to see that Model 3 doesn't even make it into the top 10 because consumers find better value in other EVs for a cheaper price

2) Batteries concern

- Nobody wants to drive their car for a long distance trip and worry that their batteries will run flat right? That explains why a PHEV gives consumers more assurance.

3) Varieties

- Consumers want options. They want different price range models & different types of EVs that cater to their needs. Which is why EVs like Wuling HongGuang Mini EV is selling so well. Because it is perfect for short distance urban usage.

So why do I think Tesla is struggling?

Because their biggest competitor BYD has everything that Tesla doesn't have. BYD not only has more competitive prices but also better control over its supply chain, and the ability to produce its own chips, batteries, and semi conductors. In fact, before BYD was an EV company, it's main business was to produce batteries.

Tesla may be leading in the premium sector as can be seen by the sales of its's Model Y. However it is lagging in the mass market sector as you can see that Model 3 doesn't even make it in into the top 10 models in China.

Another headwind that Tesla is going to face is when it's current corporate tax rate of 15% granted by the Shanghai Government for 2019 through 2023 is going to end. Without further extension, Tesla will have to pay 25% corporate tax rate like everyone else and that is going to eat into their profit margin.

So with margin being squeezed, what's next? Stock price is being squeezed too.

You can see that price has been trading within $50 range since Feb 2023. This $50 price range is very similiar to the previous range from Aug 2022 to Sep 2022. What is even more similar is the way the daily RSI hit a higher high of 75, rebound at 40 before going up to a lower high of 63. If this pattern is going to repeat, I think price will break first support line at $182.61 follow by key support level at $163.91 to look for $101.81 set on 06/Jan/2023.

So what will I do?

If I am holding 100 shares, I will Sell a Call option and Buy a Put option to hedge for any possible downside. The Call premium will be used to fund the Put premium.

Example:

Sell 23/06/16 $220 Call at $7.85

Buy 23/06/16 $160 Put at $8.30

If I just want to protect my profits (without the hassle of options), I will set a stop loss at $179.50. If I have more room to play and doesn't mind waiting for a clearer picture, I will set a stop loss at $162.50. Because if price breaks below $163.91, a key support line is lost and there is a good chance for price to go down further.

*By the way, please do not try to bet on the downside and Sell a "naked" Call to buy a Put. If you do not understand what it means, then please don't even think about it. That is extremely risky if the price doesn't go your way and I wouldn't want to do that with a stock like Tesla.

I understand some people will not be keen to hedge this way because if market goes back to $300, your profit will be capped at $220. However let's not forget that this is no longer 2020-2022 where interest rate was at zero. Interest rate is at close to 5% now and the market doesn't have the firepower to pump equities like before. In fact market is still very nervous for the next black swan event that is going to happen after SVB and CS.

Therefore it is better to play safe and PROTECT your capital at all costs. If this chart pattern doesn't replicate, it is also not too late to go long or buy calls for the upside.

I know bearish article rarely gets featured, but I hope enough people can read about this article and help to repost it so that more people can be aware of the possibility of Tesla "crashing". It has already crashed once, and it can happen again. *fingers crossed*

Good luck traders. Cheers!