High Expectations for This Wall Street Favorite

On April 27, I wrote about a stock that I hate for personal reasons.

But personal feelings don’t stop me from taking a trade if the setup is right.

In this case, the setup was definitely worth trading.

The stock in question was Tesla. I noticed it was possible the stock was putting in a tradeable bottom.

There were a number of different technical factors all lining up to suggest that Tesla could be in for an explosive move higher.

Indeed, since April 27, Tesla has rallied by as much 30%. And there could be much further for the stock to still go.

Tesla put in its bottom the exact same day I happened to write about it. It’s always cool when that happens, but I’ll be the first to admit that’s the exception rather than the rule.

In any case, the rally I was looking for got underway quite quickly. The stock climbed 30% over the next month, hitting a price level of $185.

And this past Friday, May 26, it looks like Tesla has finally run out of steam and is due for a bit of a pullback.

To be clear, I still have high expectations of the stock. My analysis calls for a move to around $270. But the short-term technicals are giving me plenty of reasons to be cautious right now.

That’s why I’ve prepared an updated price chart of Tesla. We can look at it together and I’ll let you know what I expect to happen in the near-term.

First, prices have reached the upper boundary line of the channel (blue lines). This can serve as short-term resistance for the market and could see prices pull back before attempting another breakout.

Second, you can see how the stock is now trading far away from its 50-period moving average (MA – red line).

Prices can definitely peel away from the 50-MA – just look at the rally from January to February – but can’t do so forever. Eventually, the market has to revert back to its mean.

Finally, the Relative Strength Index (RSI) at the bottom of the chart is now giving overbought signals. The RSI is my favorite momentum indicator. It’s highly effective when you pair it with other technical tools.

An overbought reading (above 70) on its own doesn’t hold much value. But an overbought reading paired with prices trading near a resistance trendline, and far away from its 50-period MA, means it’s likely we can expect some near-term weakness.

As a result, I wouldn’t be shocked to see the market trade start to trade lower.

There will be a bit of an initial bump thanks to the resolution of the debt ceiling talks, but the technical picture is quite clear.

That said, if my bigger-picture analysis is correct, then this pullback could setup another great opportunity to ride Tesla to much higher prices.

Happy trading,

Imre Gams

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