From a multiyear perspective, note that Tesla stock traded in an orderly channel for several years until it began to explode higher, and thus out of the channel in April of this year.
TSLA rallied more than 200% over the course of the ensuing three-and-a-half months and quickly became the hot word on the Street among trading pros, as well as bystanders.
The issue as always is what happens when a stock becomes a must-have household name — which in this case, coupled with a nasty short squeeze, flipped the slope of the stock vertically. It is not often that I see vertical moves in stocks last longer than a few days, but the one in Tesla Motors lasted for months and thus is a serious outlier, statistically speaking.
In other words, it was just a matter of time until a meaningful mean-reversion move got underway — yesterday’s price action likely is the first step along that path.
Concerning the daily chart: Investors with a close eye on the stock did get an early warning signal on Monday that the stock was due for a slide.
Traders with a little more technical orientation noted a crystal-clear so-called “dark cloud candle” that day. The dark cloud must have a closing price that is:
- Within the price range of the previous day, but
- Below the midpoint between opening and closing prices of the previous day.
And Monday’s price action did just that relative to last Friday’s price action, which then was followed by the nasty selling day Tuesday.
Courtesy of the vertical rally in TSLA, it hasn’t so much as sniffed at any of its more moderate moving averages in some time. Take the 50-day simple moving average, for example, which the stock last touched in late March. With yesterday’s selloff, Tesla stock is now within 9% of this moving average.
Also note that since early May the stock has developed an up-sloping channel (blue parallels). Should the stock drop below it, that would call for much lower prices — in this case, likely somewhere around the $80 area.
Still, for right now, I’m not chasing this stock lower. After yesterday’s drop, I am looking for the stock to gain some composure again before I will consider the short side of TSLA again.