Of Patterns and Psychology: Shorting TSLA by the Numbers

I love tracking the assets that develop cult-like status. The kind where the narratives are powerful and the emotions run high, where our behavioral biases become most transparent. It’s why it impossible to take your eyes off of bitcoin these days.

But it’s also true for TSLA. Over the past two months, TSLA for me went from financial entertainment to an investment idea, and I wanted to walk followers through how that happened and how I’d manage it.

Back in October I noticed that TSLA was forming a bearish pattern. It made sense to short it based on the pattern alone.

One year chart of TSLA. The break is clear.

Since it’s not core to what I do, I did it in small size, mostly for sport. But as I tracked it it became clear to me that TSLA’s financial runway was getting shorter every time there was an announcement of a large car company making up ground in the EV space. And these announcements were becoming more frequent. It was equally clear that Elon Musk is the kind of guy who has a dream and would go for broke trying to achieve it. I wrote a quick post about it here.

So, with TSLA forming a large topping formation and with falling odds of achieving the ‘good’ binary outcome, it has become an attractive risk/reward short from both a fundamental and technical standpoint. I suspect that below 300 is where the TSLA fan boys would start to abandon ship.

Three year chart of TSLA, highlighting the forming top

The problem though, is that TSLA, if things do work out, could go Amazon on you, which for a short position would be deadly. So, you have to set parameters to manage the risk.

Here’s how I’d do it.

If you have no position, decide how much of your NAV you’re willing to lose if wrong. That’s the first thing you need to do. Then look at where a natural stop would be if you were to short some here. My read of the chart is you want to be totally out if 350—the top (roughly) of the current range. If I saw TSLA hit 350, I would be convinced that my topping scenario is not playing out. It might play out later, but it is not playing out now.

I would then size my initial position. TSLA is currently trading at ~330, so a break of 350 would generate a loss of 6%. As an example—because this is a very portfolio-specific choice—if I were willing to lose 50bps of NAV, this would allow me a position size of 8.3%.

If we hit 350, then you’re out and you’ve lost 50bps of performance. However, if you’re right and 300 breaks and the major top is completed, that means the odds of the Zero scenario have increased and you can add to the position.

This is how I would do add to it. If TSLA closes below 300 for two consecutive days, you can add to the short. I would—again this is a very portfolio-specific decision—double the position. I would then put a stop on the new portion of the position at a close back above 305. And I would lower my stop on the first portion of my position from 350 down to a close above 315. This would give you an all-in breakeven on the trade if the breakdown turned out to be false (which happens a fair amount), and a first target of 200 if the break plays out. Once you get to 200, you could then take profits on one half of the position, and let the rest run—after lowering the stop on it to 250.

I am not a TSLA expert. I have no emotion or pride invested in TSLA failing. In fact, I very much admire all of the amazing innovation Elon Musk has catalyzed. But patterns and the psychology drive most of my trading decisions, these factors are telling me TSLA is a good risk/reward short here.

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