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After entering a bear market, tumbling Tesla shares could be poised to fall further

Key Points
  • Tesla's stock is mired in a 'technical bear market', with investors nervous.
  • The company's shares bounced on Friday, but some think the worst is far from over.
  • Demand isn't Tesla's problem, but an analyst said the company will need to "step up big" this year.
Trading tumbling Tesla shares
Trading tumbling Tesla shares

Some strategists say that slumping shares of Tesla could be in for even deeper losses, as the auto maker faces big tests of investor sentiment and its business strategy.

Tesla stock ended its worst weekly run in about a year and a half, dropping over 13 percent this week and briefly dipping into a bear market. The automaker faced down a litany of bad news, including delivery numbers that missed expectations, a set of bearish forecasts, and poor results in a vehicle safety test.

On Friday, the stock managed to pare some of its weekly losses, rising 1 percent to trade above $313 after the company reported in-transit vehicle figures that cheered investors.

From a technical perspective, the stock is hovering roughly $10 to $20 above critical levels, said Oppenheimer head of technical analysis Ari Wald. The stock rocketed from a little over $216 in the beginning of the year to an all-time high near $387 in late June.

With the stock falling 20 percent from those highs, Tesla has entered what some would term a "technical bear market."

Tesla's ability to supply cars is key, as the company has "never had a problem with demand," said Boris Schlossberg, managing director for foreign exchange strategy at BK Asset Management.

"The key question is, are they going to be able to ramp up supply? That is a big Achilles heel, because they have always come up short. So they're really going to have to step up next year," Schlossberg told CNBC's "Power Lunch" this week.

If the automaker can achieve deliveries in the ballpark of 200,000 units, he said, the stock could bounce back. On the other hand, if it continues to "disappoint with supply, that's when you get into trouble and I think the stock could really sell off hard."

42 percent drop?

On Monday, Tesla reported that global deliveries in the first half of the year were at the low end of its own forecast for the Model S and Model X SUV.

Additionally, registrations in April for Tesla vehicles dropped in California, the company's largest market. According to the findings from IHS Markit, registrations fell 24 percent year-over-year.

Tesla's mounting woes have prompted Goldman Sachs to lower its six-month price target on the stock to $180 from $190. That implies a 42 percent downside from Friday's closing price.

"We remain sell rated on shares of TSLA where we see potential for downside as the Model 3 launch curve undershoots the company's production targets," analyst David Tamberrino wrote in a note to clients on Wednesday, adding that margins in the second half of the year are likely to disappoint.

"This comes as demand for TSLA's established products (Model S and Model X) appear to be plateauing slightly below a 100k annual run rate," he added.

Get short

Short interest in Tesla is appearing to rise after declining in June, financial research firm S3 Partners' director of research Ihor Dusaniwsky wrote in a note Thursday. Over 400,000 shares were shorted this week alone, he wrote. Though Tesla's notional short interest exposure dropped, Dusaniwsky observed short sellers were actually not adding to their short positions.

In other words, short sellers were not "actively 'topping off' their positions in order to keep their notional exposure stable," he wrote, but were merely content taking their "unrealized profits."

Even when short sellers were down over $5 billion in unrealized losses, he continued, "there was no rush to exit their positions."

He added: "Tesla shorts may be one of the only stocks that is totally immune to a price short squeeze, and with ample lendable stock borrow inventory available, there is little chance of a technical stock loan related short squeeze," the analyst wrote. A "short squeeze" occurs when a stock's price is driven higher as a result of short sellers rushing in to cover their positions.

Investors ought to focus on the range between $290 and $300, Oppenheimer's Wald said this week on CNBC's "Power Lunch." He added that Tesla will likely continue working in the long-term — so long as the stock remains above that range.

"The stock was capped below that level from 2014 into 2016. We broke through that level this year. Now we are correcting back; typically the former breakout level becomes support," Wald said.

"Now we're slicing down pretty quick. From a near-term trading basis, I would like to see that stock stabilize, and I think you want to see a multi-week, maybe even a multi-month base begin to develop," the analyst added.

Correction: This story has been revised to reflect that Ihor Dusaniwsky is head of research for financial analytics firm S3 Partners.