Trade of the Day: TSLA Stock Reaches Historic Overbought Readings

TSLA stock reaches the $500 mark in a historic rally. Now the risk is to the downside.

Shares of Tesla (NASDAQ:TSLA) have been on a major rally of late, much in conjunction with the broader U.S. stock market rally. While I personally like what Tesla is doing as a company, the stock in the near-term is likely getting very overbought. Active traders and investors could look at it from the short side for a trade.

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Every time I discuss TSLA stock I must tell readers that in my 20 years as a trader and investor thus far, I have never seen a stock with such a dichotomy of investor sentiment. Most investors either love the stock or think of it as the evil of all stocks. Very few people are in the middle.

This results in the stock being able to have severely strong rallies and selling sprees. And through this lens, Tesla is an above-average ‘risky’ stock.

Speaking of sharp rallies, since early October 2019 TSLA stock has rallied more than 120%. While a fundamental story can definitely make the case for the bull move, other factors such as short covering, indexing effects, and trend following algorithms likely also helped propel the stock higher.

TSLA Stock Charts

Source: TradingView

As a result of the sharp multi-month move, the stock has reached the very upper end of its longer standing trading range as marked by the black diagonal line on the multi-year chart. Additionally, the stock has now reached the round number of $500, which for both algorithms and investors, are simple upside targets to circle.

From a momentum perspective, as one would expect after such a sharp multi-month rally, TSLA stock on the weekly MACD momentum oscillator at the bottom of the chart is wildly overbought. While that does not mean that the stock right here, right now, must stop dead in its tracks and head lower, it does make ‘chasing’ the stock higher from here a riskier bet.

Source: TradingView

On the daily chart we can see how persistent the rally in TSLA has been over the weeks and months. Most recently the stock has held above its blue 8-day simple moving average since early December, which even for TSLA is a historic feat and one that in my opinion ultimately will lead to a potentially sharp mean-reversion move lower.

Less risk-averse active investors and traders at this juncture could look at playing TSLA stock from the short side in small size. A next downside target is $445 while any further bullish reversal upon a rally pause would be a stop loss signal.

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