Tesla Inc. TSLA gapped down to start the trading day on Monday after three bearish days between Wednesday and Friday dropped the stock down almost 13%.
After the market opened, the Austin, Texas-based car company began to bounce about 1.7%. Whether a multi-day rebound is in the cards or whether the morning price action is a bull trap will take some time to become known.
Through the most recent nine-day retracement in the general markets, which saw the S&P 500 decline over 8%, Tesla initially showed comparative strength.
When Tesla attempted to break up above the $315 level on Sept. 20 and Sept. 21, the stock formed a bearish quadruple top pattern, when paired with the price action on Aug. 4 and Aug. 6, which became recognized and set the stock into a downtrend on smaller time frames.
A double top pattern is a reversal indicator that shows a stock has hit a key resistance level, declined, back tested the level as resistance and is likely to retrace again. It is possible the stock may retest the level as support again creating a triple top or even quadruple top pattern.
The formation is always identified after a security has shot up in price and is at the top of an uptrend whereas a bullish double bottom pattern is always found in a downtrend. A spike in volume confirms the double top pattern was recognized and subsequent increasing volume may indicate the stock will reverse into a downtrend.
- Aggressive bearish traders may choose to take a position when the stock’s volume spikes after the second retest of the resistance level. Conservative bearish traders may wait to take a position when the stock confirms a downtrend with the formation of a lower high.
- Bullish traders may choose to wait for the stock to surpass the price at which the stock formed the double top pattern. The level may then become support.
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The Tesla Chart: After attempting to regain the $315 level as support multiple times and failing, Tesla gapped down to start the trading day on Thursday and Friday, which created back-to-back bearish kicker candlesticks. On Monday, Tesla gapped down for a third consecutive time and immediately started to bounce, which indicates a pattern named “three-gap down reversal” was recognized.
- Although Tesla negated its most recent uptrend by printing a low under the Sept. 16 higher low of $295.60, the stock hasn’t yet formed a lower high to confirm a downtrend is in the cards. Bearish traders will be watching for Tesla to form a bearish reversal candlestick, such as a doji or shooting star candlestick, under the $313 level to take a possible position.
- Bullish traders may choose to wait and see if Tesla can regain the 200-day simple moving average (SMA) as support, which was lost on Sept. 22. Tesla has been battling the 200-day SMA –an important bellwether indicator, since July 29, indicating indecision about whether the stock is in a bull or bear cycle is currently playing out.
- Tesla has resistance above at $285.83 and $300.90 and support below at $271.71 and $254.98.
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