The tumble in Tesla Inc.’s stock on Thursday has confirmed a bearish short-term “double-top” pattern, just like the one seven months ago that preceded the plunge at the end of 2022.
A “double top” depicts failure by bulls, as after a pullback from a fresh high the ensuing bounce isn’t able to re-establish the uptrend. If the next pullback falls below the previous pullback’s low, the failure is confirmed, and the outlook becomes bearish.
For Tesla’s stock TSLA, -9.75%, the 3 1/2-month closing high of $ 214.24 on Feb. 14 represented the first top and the March 31 peak of $ 207.46 marked the second top, while the March 9 closing low of $ 172.92 was the first pullback’s trough.
Thursday’s selloff after the electric vehicle maker’s disappointing first-quarter results took the stock below that trough, to suggest the short-term uptrend off the 2 1/2-year low of $ 108.10 hit on Jan. 3 has ended.
FactSet, MarketWatch
As noted by Frank Cappelleri, technical analyst at CappThesis LLC, the latest double-top pattern “appears like the pattern that developed last summer,” just before the stock’s bottom fell out in late September.
The stock’s Relative Strength Index (RSI), which is a momentum indicator that compares the magnitude of recent gains with the magnitude of recent losses, was also showing a similar pattern of lower highs while the stock was seeing higher lows. This “bearish technical divergence” suggests each rally was taking more out of the bulls, and that momentum was starting to swing to the bears.
FactSet, MarketWatch
One thing to keep in mind, however, is that at the beginning stages of the September selloff, the broader stock market was also falling. “Clearly, things have changed since then from that perspective,” Cappelleri wrote in a note to clients.
That’s not all. Despite the stock’s big 86.8% bounce off the Jan. 3 low, the 50-day moving average failed to cross above the 200-day moving average that was still declining, which suggests the bounce was big enough to reverse the longer-term downtrend. Read more about the 50-day and 200-day moving averages.
“The same thing happened last summer/fall, which enhanced the ensuing downturn,” Cappelleri wrote.
FactSet, MarketWatch
On what may be a bright note, the stock’s selloff on Thursday has reached the next key Fibonacci retracement level, which could provide some short-term support for a bounce.
Wall Street followers of the Fibonacci ratio of 1.618, also known as the “golden,” or “divine,” ratio for its prevalence throughout natural systems, believe the first area of support sits around the 38.2% retracement level (1 minus 0.618) of the prior uptrend. Read more about the Fibonacci ratio.
Also read: 5 charts to help unravel the Elliott Wave mystery.
Coincidentally, the $ 41.32 pullback from the first top to the March 9 low represented 38.9% of the $ 106.14 rally off the Jan. 3 low to the Feb. 14 peak, to fall just below the 38.2% retracement level of $ 173.69, before the stock bounce.
FactSet, MarketWatch
The next two key retracement levels are 50.0%, which sits at $ 161.17, and 61.8%, which comes in at $ 148.65.
The stock dropped as much as 11.1% to an intraday low of $ 160.56 on Thursday, or below the 50% retracement level, but bounced to close just above it, down 9.8% at $ 162.99.
Many Fibonacci followers believe that if a decline surpasses the 61.8% retracement level, the previous uptrend has lost its influence on the stock, and fresh lows may be on the horizon.