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A Climactic Day For Tesla In Every Sense

Published 11/10/2021, 09:25 AM
Updated 07/09/2023, 06:31 AM

Tesla Daily Chart.

It was a climactic day for Tesla (NASDAQ:TSLA) yesterday in every sense of the word. And, no doubt, it was an unpleasant one for call-option holders and longer-term investors. The stock closed on a wide spread down candle on extreme volume, with the price ending the session at $1,023.50, shedding more than $150 on the day.

For regular followers of my analysis and for volume traders, my post Oct. 21 entitled ‘The warning flags flying for Tesla on the weekly chart,’ received a degree of abuse. While I accept stocks like Tesla inspire great, almost fanatical following, I can only write what I see. It is not a judgment call, but simply a response to the technical picture. Moreover, stocks (even those on a seemingly unstoppable trajectory) always correct and pull back. These points, or staging posts on the trajectory, are places where there is likely to be profit-taking as well as offer potential entry points – assuming the price-volume relationship supports this.

However, the price action that has ensued since my ‘warning flags analysis’ does raise an interesting aspect of the volume price analysis methodology. 

When we see a strong VPA signal, such as a shooting star or hammer candle on high volume, as traders, we can get ahead of ourselves at the prospect of a reversal or break higher. But on many occasions, we have to remain patient. The initial signal we often see is just that – an early warning of changes ahead. The reason this occurs is not hard to understand once we consider what is happening behind the scenes. The analogy I have used many times is that of an oil tanker. Switch off the engines and the vessel will continue under its own momentum for several miles before coming to a stop. It is the same in trading. When a market is rising or falling strongly, it takes time and effort on behalf of the market-makers to bring such powerful moves to a stop and reverse. It is impossible to do on one candle. Such reversals are, therefore, rare. There is always a ‘run on’ effect, and Tesla here is one such case. The signals were clear to see, but the market continued higher, driven by euphoria but not substantiated with volume. Hence, the reason we have now arrived at yesterday’s price action. Although looking at the price action of the last couple of weeks, there have been further signals on the daily chart, and in my original post, I also referenced the monthly chart, which also highlighted a falling away of volume to support the rise in price.

But to return to the daily chart. First, we saw the price rising on falling volume early in November, with the stock not advancing in any meaningful way. Second, at the top of the chart, we have two spinning tops, with the first having been gapped up on low volume, and a clear trap move.

So where next for Tesla?

Putting my head above the parapet once again, yesterday may simply be the start of further weakness to come. As I mentioned earlier, price and volume were in agreement yesterday. One was confirming the other, therefore, reinforcing the fact this is a genuine move.

Next, note the volume on the VPOC histogram and, in particular, the dramatic way this falls away as we approach the $1,000 per share price and all the way through to $800 per share. It is not a pretty sight for call-option holders or investors, as yesterday’s price action no doubt triggering a wave of put positions. As I have explained before, volume on the VPOC histogram acts in the same way as price-based support and resistance. So with little now below in terms of potential support, either from a price or volume perspective, we could see Tesla move to test the $800-per-share area in the medium term or even move towards the VPOC (volume point of control) itself above $700, where a firm base would then be built.

But as always it is the volume that holds the key which will ultimately dictate the longer-term direction for this stock.

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