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Larry’s note: Welcome to Trading with Larry Benedict, my free daily eletter, designed and written to help you make sense of today’s markets. I’m glad you can join us. My name is Larry Benedict. I’ve been trading the markets for over 30 years. I got my start in 1984, working in the Chicago Board Options Exchange. From there, I moved on to manage my own $800 million hedge fund, where I had 20 profitable years in a row. And, I’m featured in the book Market Wizards, alongside investors like Paul Tudor Jones. But these days, rather than just trading for billionaires, I spend a large part of my time helping regular investors make money from the markets. My goal with these essays is to give you insight on the most interesting areas of the market for traders right now. Let’s get right into it… |
It sure has been a big week for Tesla.
After rallying 30% in just six trading days, its 8% gain on Tuesday was enough to re-join the trillion-dollar club.
It’s a very different story than in December…
Back then, Tesla was heading in the opposite direction.
As we noted at the time, Tesla was on track to lose one-third of its value by year end.
But after falling 29% from its November 2021 high (A) through its December low, Tesla moved up to a lower high (B) early this year.
However, up until this past week, it was all one-way traffic…
This time, Tesla fell by a staggering 40% (42% if you include the morning open on the first day of the Ukraine invasion) before it eventually found support (orange line on the chart below).
After such massive swings, today I want to check out what’s next for this never-boring stock.
Take a look at the TSLA chart…
Tesla (TSLA)
Source: eSignal
Tesla was slowly grinding higher coming into October last year…
The Relative Strength Index (RSI) was trading in the upper half of its band (above the green line). Each time it tested support and held, that was the precursor for Tesla’s next move higher.
The long-term 50-day moving average (MA – blue line) was in a gradual uptrend too. The 10-day MA (red line) was tracking comfortably above the 50-day MA after breaking above it in June (a bullish signal).
Then, in October Tesla went on a tear…
You can see the speed of that rise in the gap at which the 10-day MA broke above and away from the 50-day MA.
The rally was so sharp that when TSLA eventually peaked at ‘A’, the RSI was at a staggering 94%! Remember that anything over 70% (upper grey line) is typically regarded as overbought.
However, the steady decline in the RSI that followed that spike (1) caused Tesla’s uptrend to turn into a downtrend…
Let’s take another look at the chart…
Tesla (TSLA)
Source: eSignal
The fall from ‘A’ to the lower high at ‘B’ coincided with the RSI making a lower high at ‘2’. Tesla’s share price then continued to drift lower, with the RSI moving into the lower half of its channel (below the green line) in mid-January.
But now, with the RSI bursting back into the upper half of its range – and the MAs getting close to a crossover – what can we expect from here?
Well, we know that for this uptrend to take hold beyond this current spike, the 10-day MA will need to break (and remain) above the 50-day MA.
Plus, the RSI will need to remain in the upper half of its band…
If both occur – with the RSI repeating a similar pattern to July through September 2021 – then Tesla’s spike could turn into a long-term uptrend.
However, Tesla’s next test will come if (and when) the RSI goes into overbought territory… which could happen soon.
We can see from both ‘A’ and ‘B’ that Tesla turned sharply lower only after the RSI formed an inverse ‘V’.
If this pattern repeats – with Tesla making a new lower high (which would become ‘C’), then the current sharp rally could quickly reverse…
Meaning that Tesla’s long-term downtrend that began in November 2021 would remain intact.
That would provide a potential setup for a short trade.
Regards,
Larry Benedict
Editor, Trading With Larry Benedict
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