Tesla Drops To Test This Level As Support: Did The EV Stock Form A Bull Trap?

Tesla, Inc TSLA was trading slightly lower in the premarket on Monday after falling 5% on Friday to back test its break up from a bull flag pattern, which Benzinga called out on Thursday. 

The drop may have caused Tesla to print it’s next higher low within an uptrend pattern, which the stock reversed into Jan. 6. 

An uptrend occurs when a stock consistently makes a series of higher highs and higher lows on the chart. 

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The higher highs indicate the bulls are in control while the intermittent higher lows indicate consolidation periods.  

Traders can use moving averages to help identify an uptrend, with rising lower time frame moving averages (such as the eight-day or 21-day exponential moving averages) indicating the stock is in a steep shorter-term uptrend. 

Rising longer-term moving averages (such as the 200-day simple moving average) indicate a long-term uptrend. 

A stock often signals when the higher high is in by printing a reversal candlestick such as a doji, bearish engulfing or hanging man candlestick. Likewise, the higher low could be signaled when a doji, morning star or hammer candlestick is printed. Moreover, the higher highs and higher lows often take place at resistance and support levels. 

In an uptrend the "trend is your friend" until it’s not and in an uptrend there are ways for both bullish and bearish traders to participate in the stock: 

• Bullish traders who are already holding a position in a stock can feel confident the uptrend will continue unless the stock makes a lower low. Traders looking to take a position in a stock trading in an uptrend can usually find the safest entry on the higher low. 
• Bearish traders can enter the trade on the higher high and exit on the pullback. These traders can also enter when the uptrend breaks and the stock makes a lower low indicating a reversal into a downtrend may be in the cards. 

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The Tesla Chart: When Tesla declined to back test the break up from the bull flag on Friday, the stock also bumped into and wicked up from the eight-day exponential moving average (EMA) on the daily chart. The eight-day EMA has been guiding Tesla higher since Jan. 9 and a loss of that level would be act as a warning sign for bullish traders. 

• Tesla’s most recent higher high within its uptrend was formed on Thursday at $214 and the most recent confirmed higher low was printed at the $162.78 mark on Jan. 31. Because Tesla hasn’t printed a confirmed higher low in eight trading days, a retracement was the most likely scenario.  
• The ticker lower has also caused Tesla’s relative strength index (RSI) to drop down to about 69%. When a stock’s RSI measures in at or above the 70% level — which Tesla’s did since Feb. 2 — it becomes overbought, which can be a sell signal for technical traders. 
• Bullish traders want to see Tesla run into buyers on Monday, to cause the stock to increase above Friday’s high-of-day, which could indicate the higher low was occurred and the uptrend will continue. Bearish trades want to see Tesla break down under the eight-day EMA, which will cause the bull flag to be negated and indicate the break up from that pattern was a bull trap. 
• Tesla has resistance above at $200.51 and $213.13 and support below at $190.41 and $177.59.