Tesla's Massive Runup Hits Bump In The Road: Is It A Buy The Dip Opportunity?

Shares of Tesla, Inc TSLA began to soar last week following a Hertz Global Holdings HTZZ announcement that the rental car company planned to place an initial order of 100,000 Teslas by the end of 2022.

Tesla CEO Elon Musk took to Twitter on Monday to “emphasize that no contract has been signed yet,” however, and added that the potential deal will not have an effect on Tesla’s revenues because the EV maker is currently unable to meet demand for its vehicles.

Tesla’s stock has skyrocketed over 120% since it began to trade in a fairly consistent uptrend on May 19 with about 35% of the run up being propelled by the company’s stellar third-quarter earnings on Oct. 20. The need for the stock to consolidate the massive move may have coincided with a report on Tuesday that stated Tesla is recalling 12,000 of its vehicles due to a software communication error.

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The Tesla Chart: Tesla was trading down about 5% at one point in the premarket on Tuesday and opened about 4% lower. The stock is still within Monday's price range, however, which may create a bullish inside bar pattern on the daily chart, which will allow for consolidation. If the inside bar pattern holds, it will also provide a play for either the bulls or the bears to begin a position when the pattern breaks either up or down.

The consolidation, whether it takes place during the regular or extended trading sessions, is needed because the stock’s relative strength (RSI) index has been extended above the 70% level since Oct. 12. When a stock’s RSI reaches or exceeds the 70% level, it becomes overbought, which can be a sell signal for technical traders. It should be noted, however, that some technical indicators can stay extended for long periods of time.

On Monday, Tesla printed a bullish kicker candlestick, which indicates higher prices are likely to come on Tuesday and the candle printed on very high volume. High volume indicates a high level of trader and investor interest and during the trading session, over 56 million shares of Tesla exchanged hands compared to the 10-day average of 46.12 million.

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Tesla has two gaps below on the chart, with the first between $910 and $944.20 and the second between the $843 and $849 range. Gaps on charts fill about 90% of the time, so it's likely Tesla will trade down into both zones in the future.

Tesla is trading above the eight-day and 21-day exponential moving averages (EMAs), with the eight-day EMA trending above the 21-day, both of which are bullish indicators. The stock is also trading well above the 50-day simple moving average, which indicates longer-term sentiment is bullish.

• Bulls want to see Tesla print a higher low on the daily chart, because the stock has not made a higher low in its uptrend since Oct. 21. Tesla has no resistance above in the form of price history but has psychological resistance at $1,250 and $1,300.
• Bears want to see big bearish volume come in and knock Tesla down below Monday’s low-of-day at the $1,118 mark. Below the level, the stock has support at $1,045 and lower psychological support at $1,000.