NEW YORK (TheStreet) -- The best thing about using pattern recognition for stocks is that whenever you recognize the same pattern, it is still a valid strategy.
One of the benefits of the Decision Support Engine is that it's tuned to search for historically repeating patterns that have highly correlated outcomes. Whenever it finds one, it warns for an outcome that is probability-ranked higher than random.
Tesla (TSLA) is now such a situation. The following chart shows red squares at the recent instances when the weekly stochastics became extended above the 90% threshold then crossed down upon each other and fell back below the 90% threshold.
What followed were significant declines averaging 34%. Again, two data points don't make a historically repeating pattern. However, the DSE searches more than just Tesla stock. It searches everything. So, whether TSLA follows through with a third (in 18 months) 34% crash, the pattern that is currently manifesting allows "informed" action to be taken or contemplated. Tesla closed Thursday at $268.79.
First, investors who are long (especially those who are leveraged) can place sell stops at a break of the June 15 low near $245. Second, as can be seen in the graph, Tesla is about to test the upper two-standard-deviation band ($276, plus or minus $4).
The last two times it has done this, the result wasn't great for those buying on the hype. Two standard deviations represents 95% of normalcy. So, remaining long at prices testing these extremes requires the arrogance that you can succeed in the 5% of normalcy that is represented in the "tail" of the bell curve. This lack of humility is rarely rewarded (at least for very long). Therefore, reducing or eliminating long exposure into the two-standard-deviation band is a prudent risk-adjusted action plan.