Tesla Traders Should Watch This Pattern

Ed Ponsi

Tesla (TSLA) has been an incredible performer in 2020, gaining 242% year to date. What are the prospects for Tesla stock going forward? We'll go to the charts to find out. 

Recently, investment bank Morgan Stanley (MS) made the unusual move of placing two price targets on Tesla - a short term target of $1050, and a long term target of $2500. 

I think it's wise to view Tesla through a variety of time frames, because traders have a time horizon of anywhere from minutes to days, while investors look farther into the future. While the same can be said of many stocks, Tesla presents a unique situation. 

In the long term, Tesla could go much higher. The $266 billion company isn't a current member of the S&P 500. If the stock is added to that large cap index, index funds and similar investment vehicles will be forced to add Tesla to their portfolios. 

Because the S&P 500 is a weighted index, the number of shares of Tesla added to portfolios would be based on the stock's market capitalization. Tesla's current market cap of $266 billion is greater than 485 of the 500 stocks in that index. 

While an addition to the S&P 500 index would bode well for the stock's long-term prospects, Tesla's chart is flashing a short-term signal in the opposite direction. Traders should pay attention to that signal because it worked well just two weeks ago.

The signal I'm referring to is a candlestick pattern known as bearish engulfing (shaded yellow). When a bearish candle engulfed Tesla's previous daily candle on July 23rd, the stock dropped sharply and still hasn't regained its earlier highs. We first mentioned that pattern here. 

Now that pattern has occurred again. On Friday, July 31, Tesla formed another bearish engulfing pattern (shaded light blue). On that day, the stock also closed beneath its 20 day moving average (green) for the first time since early April. That moving average has acted as support for Tesla for several months (arrows). 

TSLA

Tesla's short term fluctuations have been wild. Over the past 14 trading days, the average daily price move for Tesla has been $107 (bottom right of chart). 

Bottom line: the short-term direction for Tesla is mildly bearish, but the stock's long-term prospects remain wildly bullish. 

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Ed Ponsi is the managing director of Barchetta Capital Management, and is the author of three books for publisher Wiley Finance. A dynamic public speaker, Ed has made appearances around the world, in such diverse locations as Singapore, Dubai, London, and New York. For more information about Ed and his work, click here.