Elon Musk-Led Tesla Stock Trades In Overbought Territory: The Bull, Bear Case

Tesla, Inc TSLA popped over 4% higher Friday on increased bullish momentum but formed a reversal candlestick, which suggests lower prices are on the horizon.

The stock has been trading in an uptrend, but Tesla’s relative strength index is measuring in at overbought on most significant time frames, which suggests a retracement is on the horizon.

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. Moreover, 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.

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The Tesla Chart: Tesla has been trading in an uptrend since April 27, making a consistent series of higher highs and higher lows. The stock’s most recent higher low was formed on June 12 at $212.53. The most recent confirmed higher high was printed at the $221.91 level on that same day.

• On Friday, Tesla gapped up to open the trading session and didn’t fall enough to close that gap. Gaps close about 90% of the time, making it likely Tesla will drop to reach the lower range of the gap, which exists between $235.23 and $242.02 in the future.
• If Tesla falls on Monday, bullish traders who aren’t already in a position can watch for the stock to form a reversal candlestick, such as a doji or hammer candlestick, near the bottom of the gap for a possible entry. Bearish traders want to see Tesla print a lower low, which could increase downside pressure.
• If Tesla starts to fall on big bearish volume in tandem with other mega-cap stocks, volatility in the stock market could increase. Traders wishing to trade the volatility in the stock market can use MIAX’s SPIKES Volatility products. The products, which are traded on SPIKES Volatility Index SPIKE, track expected volatility in the SPDR S&P 500 over the next 30 days.
• The stock has resistance above at $254.98 and $271.71 and support below at $234.35 and $225.03.

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