Thursday’s decline in Tesla Inc shares confirmed a bearish short-term “double-top” pattern, similar to the one seen seven months ago before the end of 2022 collapse.
A “double top” depicts the failure of the bulls, after pulling back from a new high, and subsequent bounces fail to re-establish the uptrend. If the next pullback falls below the previous pullback low, failure is confirmed and the outlook turns bearish.
For Tesla’s stock
The 3 1/2-month closing high of $214.24 on February 14 marked the first peak and the March 31 high of $207.46 marked the second top, while the March 9 low of $172.92 was the first trough.
Thursday’s sell-off after the electric vehicle maker’s disappointing first-quarter results took shares below that trough, suggesting a short-term rally at a 2 1/2-year low of $108.10 hit on Jan. 3.
As Frank Cappelleri, a technical analyst at CappThesis LLC, noted, the recent double-top pattern “looks like a pattern created last summer” just before stocks bottomed out in late September.
A stock’s Relative Strength Index (RSI), a momentum indicator that compares the magnitude of recent gains to the magnitude of recent losses, shows similarly low highs while stocks have seen high lows. This “inferior technical divergence” meant that each rally was pushing the bulls out more, and that momentum began to swing to the bears.
One thing to remember, however, is that during the early stages of the September selloff, the broader stock market also fell. “Clearly, things have changed from that perspective,” Cappelleri wrote in a note to clients.
Not only that. Despite the stock’s big 86.8% bounce on January 3, the 50-day moving average failed to cross the 200-day moving average. Read more about 50-day and 200-day moving averages.
“The same thing happened last summer/fall, which fueled the subsequent fall,” Cappelleri wrote.
On a brighter note, the selloff in stocks on Thursday hit the next key Fibonacci retracement level, which could provide some short-term support for a bounce.
Followers of Wall Street The Fibonacci ratio is 1.618, also known as the “golden” or “divine” ratio, which spreads across natural systems, believes that the first area of support will be around the 38.2% retracement level (1 minus 0.618) of the previous uptrend. Read more about the Fibonacci ratio.
Read more: 5 Charts to Help Unravel the Elliott Wave Mystery
Coincidentally, the $41.32 retracement from the first peak on March 9 represented 38.9% of $106.14.
The next two major retracement levels are 50.0%, which comes in at $161.17, and 61.8%, which comes in at $148.65.
The stock fell 11.1% to an intraday low of $160.56 on Thursday, or just below the 50% retracement level, but fell 9.8% above that to $162.99.
Many Fibonacci followers believe that if a decline crosses the 61.8% retracement level, the previous rally has lost its influence on the stock and new lows may be on the horizon.