Tesla Inc.’s stock has recently broken through the bottom of a “triangle” consolidation chart pattern, causing concern among investors for potential further weakness. The electric vehicle giant’s stock, TSLA, -10.44%, has already experienced its largest two-day drop in two years following a disappointing earnings report. However, the stock has now reached a significant chart zone with multiple support points that could potentially slow down or even halt the decline.
Symmetrical Triangle Pattern Signals Continuation
The consolidation pattern in question is a symmetrical triangle, characterized by a declining trendline at the top and a rising trendline at the bottom. Both trendlines have similar angles that converge towards a future meeting point. Traditionally, consolidations shaped as symmetrical triangles are seen as continuation patterns, meaning they are often resolved in the direction of the preceding trend. In Tesla’s case, the stock had surged by 91% in just two and a half months before entering the consolidation phase, implying a higher likelihood of a breakout at first.
Breakdown Confirmed Following Earnings Report
However, Tesla’s stock opened below the bottom of the triangle after the company released its underwhelming earnings report, making it clear that a breakdown had occurred. In addition, the stock also fell below a rising trendline that had originated from a 2 1/2-year low reached in January. This further confirmed the bearish technical outlook for Tesla.
Finding Support Amidst Significant Decline
Although the stock has witnessed a significant decline of 10.2% in afternoon trading and a total drop of 14.5% over two days, there is still a silver lining. Tesla’s stock is now approaching potentially strong support levels indicated by multiple chart points. This support includes the 200-day moving average and previous peaks and troughs that could attract buying interest. Analyst Katie Stockton from Fairlead Strategies LLC has highlighted these significant support levels.
Despite the worries surrounding Tesla’s stock following recent developments, the presence of these support points provides a glimmer of hope for the electric vehicle giant. Investors will now closely monitor the stock’s movement to see if the support can indeed slow down or reverse the current slide.
The Battle at the 200-DMA
The 200-day moving average (200-DMA) is a significant indicator for chart watchers. It serves as a dividing line between longer-term uptrends and downtrends, becoming a battleground between bulls and bears. Typically, it offers support on the way down and resistance on the way up.
Currently, the 200-DMA sits around $214.18, as reported by FactSet data.
Drawing from candlestick charting expert Steve Nison’s concept of “change in polarity,” the highs reached in February just above $214 and the late-March high around $208 could attract buying interest. This theory suggests that those who aggressively sold shares at these levels to halt rallies may be inclined to repurchase them at breakeven when the stock surpasses those levels a few months later.
The validity of this concept is confirmed by Tesla’s stock, as the August low falls within the range of previous highs.
Read: Tesla’s stock falls after earnings. Is Wall Street missing the big picture?
In the event that the support zone breaks, a “measured move” calculation can determine the next downside target area. This calculation involves subtracting the height of the broken triangle from the breakdown point.
In this case, the triangle has a height of approximately $78 on a closing basis, with the breakdown point occurring around $243. Therefore, the downside target would be around $165, aligning with the May lows.
However, before the support zone is truly tested, breakdowns like the one experienced on Thursday are often followed by bounces back to the breakdown point. This serves as an opportunity for bulls to test the resolve of bears who missed their chance to sell during the initial breakdown. As a result, these bears tend to rush to sell when given another opportunity.
Observing how Tesla’s stock behaves in the next couple of sessions may provide valuable insight into its future behavior at the support zone.
