Is Tesla Stock Revving Up For A Big Reversal Or Forming A Bull Trap?

Tesla, Inc TSLA was soaring over 10% higher on Tuesday in tandem with the S&P 500, which was spiking up about 2.4%.

The surge higher negated a downtrend Tesla had been trading in since June 2, when the stock topped out at $792.63. Although an uptrend has not been confirmed on the daily chart because Tesla hasn’t printed a higher low, traders can watch for the stock to print a possible reversal candlestick above the most recent lower low to indicate a trend change to the upside.

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

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. 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: Tesla negated its downtrend by rising up above the most recent lower high of $709.53, which was printed on June 15. The rise also caused Tesla to regain the eight-day and 21-day exponential moving averages (EMAs) as support.

If the stock is able to remain trading above the 21-day EMA for a period of time, the eight-day EMA will cross above the 21-day, which would give bullish traders more confidence going forward.

The reversal also caused Tesla to break up from a falling channel pattern on the daily chart. When a stock breaks bullishly from a falling channel it can indicate a larger reversal to the upside is in the cards.

• If Tesla closes the trading day near its high-of-day price, the stock will print a bullish kicker candlestick, which could indicate higher prices will come again on Wednesday. The second most likely scenario is that the stock will print an inside bar pattern to consolidate Tuesday’s move.
• If Tesla runs into sellers at the end of the day and closes the trading day with a large upper wick, it could indicate lower prices are on the horizon. Eventually Tesla will retrace to the downside and both bullish and bearish traders can watch to see where the stock reverses course to determine if an uptrend will take place or whether Tuesday’s bullish move was a bull trap.
• Tesla has resistance above at $720.95 and $745.63 and support below at $700 and $671.64.

Photo courtesy of Tesla.