Tesla, Inc (NASDAQ:TSLA) stock was slipping Tuesday after two big bearish days on Friday and Monday, dropping the stock a total of 8.47% off Thursday’s closing price.
On CNBC’s "Mad Money Lightning Round," Jim Cramer said the EV giant has "got the worst chart I’ve ever seen, and that’s what’s driving things."
Conversely, the S&P 500 has attempted to climb higher over the last three trading days, but the moves have been hampered by Tesla’s bearish price action. Tesla holds the 8th largest weighting in the S&P 500, making up 1.44% of the index.
Although Cramer is correct that Tesla’s chart is very bearish, the stock looks set to bounce over the coming days because Tuesday’s drop caused Tesla’s relative strength index (RSI) to fall to the 27% level.
The RSI is an indicator technical traders use to measure bullish and bearish price momentum. RSI levels can range between 0 and 100, with levels between 30 and 70 generally considered to be healthy.
When a stock’s RSI falls below the 30% level, it's considered to be oversold. When a stock enters oversold territory, it indicates the security's price no longer reflects the asset's true value, which can signal an upside reversal in the cards.
When a stock’s RSI rises above the 70% area, it is considered to be overbought. When a stock enters overbought territory, it signals the security's price is elevated compared to its intrinsic value, which can signal a reversal to the downside is on the horizon.
RSI is best used when combined with other signals and patterns on a stock chart because stocks can remain in oversold and overbought territory for an extended period of time before reversing.
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The Tesla Chart: When Tesla’s RSI dropped under the 30% level between Oct. 6 and Oct. 17, the stock consequently climbed 13% to reach a high of $237.24 on Nov. 1. Although a stock’s RSI can remain extended to the upside or the downside for long periods of time, Tesla’s historical price action indicates the stock is likely to bounce over the coming trading days.
- Tesla is also likely to bounce soon because the stock hasn’t printed a lower high within its current downtrend since Friday, when Tesla popped up to reach a high-of-day at $223.80. Bullish traders can watch for the stock to eventually print a bullish reversal candlestick, such as a doji or hammer candlestick, to indicate a bounce is on the horizon.
- Bearish traders who aren’t already in a position may choose to wait for Tesla to trend higher before printing a bearish reversal candlestick, such as a doji or shooting star candlestick, which is likely to form under the $220 level. The stock may also find resistance at the eight-day exponential moving average on the next bounce.
- If Tesla closes Tuesday’s session near its low-of-day price, the stock will print a bearish kicker candlestick, which could indicate more downside before a reversal. If Tesla closes the trading day with a significant lower wick, a hammer candlestick may form, which could indicate the rebound will occur on Wednesday.
- Tesla has resistance above at $190.41 and $200.51 and support below at $166.71 and $152.19.
