As Bears Grip Tesla Stock, Here's Where To Watch For The Bounce

Tesla Inc TSLA was trading about 2% higher on Friday, rebounding slightly from a bearish day on Thursday, which saw the stock slide about 4% in tandem with the general markets.

The EV giant has been trading in a downtrend since May 31, making a consistent series of lower highs and lower lows. On Friday, Tesla opened slightly higher, trading in the lower range of Thursday’s price action, which has set the stock into an inside bar pattern.

An inside bar pattern indicates a period of consolidation and is usually followed by a continuation move in the direction of the current trend.

An inside bar pattern has more validity on larger time frames (four-hour chart or larger). The pattern has a minimum of two candlesticks and consists of a mother bar (the first candlestick in the pattern) followed by one or more subsequent candles. The subsequent candle(s) must be completely inside the range of the mother bar and each is called an "inside bar."

A double, or triple inside bar can be more powerful than a single inside bar. After the break of an inside bar pattern, traders want to watch for high volume for confirmation the pattern was recognized.

• Bullish traders will want to search for inside bar patterns on stocks in an uptrend. Some traders may take a position during the inside bar prior to the break while other aggressive traders will take a position after the break of the pattern.
• For bearish traders, finding an inside bar pattern on a stock that's in a downtrend will be key. Like bullish traders, bears have two options of where to take a position to play the break of the pattern. For bearish traders, the pattern is invalidated if the stock rises above the highest range of the mother candle.

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The Tesla Chart: Tesla’s inside bar pattern leans bearish because the stock is in a downtrend and because Friday’s price action is taking place near the bottom of Thursday’s mother bar. Traders and investors can watch for a break up or down from Thursday’s range later on Friday or on Monday to gauge the future direction. The break should take place on a higher-than-average volume.

• The most recent lower high in Tesla’s downtrend was printed on Wednesday at $706.99 and the most recent confirmed lower low was formed at the $626.08 mark on Thursday. If Tesla breaks down from Thursday’s mother bar to continue in its downtrend, bullish traders will want to see the stock bounce at the $620 level, where Tesla printed a double bottom pattern on May 24 and May 25.
• If Tesla breaks down from the mother bar, the stock is likely to begin developing bullish divergence on the daily chart. Bullish divergence occurs when a stock makes a series of lower lows but the relative strength index (RSI) makes a series of higher lows. If that happens, Tesla is likely to bounce in order for the divergence to correct.

Tesla has resistance above at $671.64 and $700 and support below at $650.81 and $628.35.