Stock Of The Day: Does This Classic Pattern Suggest A Move Higher In Tesla?

Shares of Tesla, Inc. TSLA are trading lower Monday. But they continue to be in a sideways trend.

A classic ‘Flag' pattern may have formed on the chart. If so, it could be bullish for the shares and suggest the recent uptrend may soon get back into gear. This is why we have made it our Stock of the Day.

Many traders and investors were surprised and confused when Tesla rallied after posting disappointing earnings. They didn't understand why the stock moved higher. But it was simply the result of supply and demand.

Because the numbers were widely anticipated to be bad, people sold or shorted shares before the release. So, by the time the earnings hit the tape, everyone who wanted to sell had done so. The market had run out of sellers.

And a market with no supply can only move higher. Those who wish to buy are forced to push the price up to get sellers interested and draw them into the market.

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As you can see on the chart below, the move upwards was driven by a large amount of volume.

But some of the people who drove the price higher may have thought that the rally got ahead of itself. They thought that if they took a break and stepped out of the market for a few days, the stock price could decline and they could finish their buying at lower prices.

As a result of these buyers going to the sidelines, the volume that trades fell off. The sideways range that forms on the chart can end up looking like a flag, following a move higher that looks like a pole.

The flag pattern is a ‘continuation' pattern.

If the traders who drove the price higher see that their leaving the market hasn't resulted in the stock dropping, they will reenter the market and continue buying. This could force the stock into an uptrend and it may be about to happen with Tesla.

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