Avoid TSLY ETF as Tesla stock price forms bearish chart patterns

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on Mar 5, 2024
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  • The TSLY ETF has dropped sharply in the past few weeks.
  • Tesla shares have formed a death cross and a bearish flag pattern.
  • They also formed the dreaded death cross pattern on the daily chart.

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The YieldMax TSLA Option Income Strategy (TSLY) ETF has struggled this year even as American indices like the Nasdaq 100 and S&P 500 have surged to their record highs. The ETF has dropped to $17.87, bringing the year-to-date losses to 25%.

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Tesla is not doing well

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Tesla (NASDAQ: TSLA) has also not done well as it dropped by 24% this year. As a result, some analysts have argued that the company does not deserve to belong in the Magnificent 7 group of stocks. They note that Nvidia, which is now valued at over $2.3 trillion is a better replacement.

Tesla is facing substantial challenges as signs that the EV bubble has burst emerge. The EV industry is going through major issues such as overproduction in China. 

Chinese EV companies like BYD, Nio, Xpeng, and Li Auto are now building some of the best quality vehicles in the industry. Most importantly, these vehicles are now selling for much less than those made by Tesla. 

Therefore, there are concerns that these firms will do for the auto industry what it did for the steel and solar panels industry. Today, the country dominates the two sectors as foreign manufacturers have struggled to gain market share. 

Tesla is also facing thinning margins and it is unclear whether the situation will improve in the face of price cuts. The company has slashed prices several times in the past few months.

Its technicals are also not supportive. As shown below, Tesla stock formed a death cross pattern in January as the 200-day and 50-day moving averages have made a bearish crossover. 

Most recently, it has dropped below the crucial support level at $194.21, the lowest swing in October last year. This price was also the neckline of the triple-top pattern that has been forming since July last year.

The stock also formed a bearish flag pattern, which is shown in green. Therefore, the outlook for the TSLA stock price is extremely bearish, with the next point to watch being at $152.50, its lowest point in April last year.

tsla stock

Tesla stock price chart

Implications for TSLY ETF

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Therefore, we have noted that Tesla faces fundamental and technical challenges and that its stock faces substantial challenges ahead.

If this outlook is correct, it means that the TSLY ETF will also be in trouble even with its substantial dividend yield. According to its website, the ETF has a distribution rate of 51.16% and a 30-day yield of 2.39%.

For starters, TSLY is a leading covered call ETF that helps investors take advantage of Tesla’s stock performance. It uses a call option to provide regular monthly returns.

The idea behind the fund is quite simple. It invests in synthetic Tesla shares and then sells call options on the same.

In this case, the fund benefits if Tesla shares jump and possibly hits its strike price. Further, it takes the premium from the call option.

TSLY is able to provide monthly payouts even when Tesla shares retreat because of the call options premium it sells. 

However, as I wrote last year, TSLY has a long record of underperforming Tesla in both bull and bear markets. Therefore, it is quite risky to invest in the fund, which explains why it has seen outflows in the past two weeks straight, as shown below.

TSLY ETF inflows

TSLY ETF inflows and outflows

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