Thursday’s crash in Tesla Inc. shares confirmed a bearish short-term “double top” pattern, just like the pattern seven months ago that preceded the late-2022 slump.
A “double top” indicates bull failure as after a pullback from a new high, the ensuing bounce is unable to restore the uptrend. If the next pullback breaks below the low of the previous pullback, the failure is confirmed and the outlook turns bearish.
For Tesla stock TSLA, the 3 1/2 month closing high of $214.24 on February 14 represented the first high and the March 31 high of $207.46 represented the second high, while the closing low of $207.46 on March 9 represented the second high March of $172.92 was the first low of the pullback.
Thursday’s sell-off following the electric-vehicle maker’s disappointing first-quarter results took the stock below that low, suggesting the short-term uptrend from the 2-1/2-year low of $108.10 hit on Jan. 3 is finished.
As Frank Cappelleri, technical analyst at CappThesis LLC, noted, “The latest double top pattern “appears like the pattern that developed last summer” just before the stock bottomed in late September.
The stock’s Relative Strength Index (RSI), a momentum indicator that compares the magnitude of recent gains to the magnitude of recent losses, also showed a similar pattern of lower highs while the stock posted higher lows. This “bearish technical divergence” suggests that each rally was getting more out of the bulls and this momentum was starting to spill over to the bears.
One thing to keep in mind, however, is that during the early stages of September’s sell-off, the broader stock market also fell. “Clearly things have changed from that perspective since then,” Cappelleri wrote in a note to clients.
That’s not all. Despite the stock’s big 86.8% rebound from the Jan. 3 low, the 50-day moving average has failed to surpass the still bearish 200-day moving average, suggesting the bounce was big enough to hold reverse the longer-term downtrend. Read more about the 50-day and 200-day moving averages.
“The same thing happened last summer/fall, compounding the ensuing downturn,” Cappelleri wrote.
On a positive note, the stock’s sell-off on Thursday hit the next key Fibonacci retracement level that could support a near-term recovery.
Wall Street supporters of the 1.618 Fibonacci ratio, also known as the “golden” or “divine” ratio due to its prevalence in natural systems, believe that the first area of support lies around the 38.2% retracement level (1 minus 0.618) lies around the previous uptrend. Read more about the Fibonacci ratio.
also read: 5 charts to help solve the mystery of Elliott Wave.
Coincidentally, the $41.32 pullback from the first high to the March 9 low represented 38.9% of the $106.14 rally from the January 3 low to the February 14 high to fall just below the March 38 .2% retracement level from $173.69 before the stock recovered.
The next two key retracement levels are 50.0% which comes in at $161.17 and 61.8% which comes in at $148.65.
The stock fell as much as 11.1% on Thursday to an intraday low of $160.56, or below the 50% retracement level, but recovered to close just above it, down 9.8% at 162, $99.
Many Fibonacci followers believe that when a decline breaks the 61.8% retracement level, the previous uptrend has lost its grip on the stock and new lows could appear on the horizon.