Tesla Motors (TSLA) In Candlesticks

Posted by barkand on November 28, 2010 under Candlestick charts | Be the First to Comment

The current daily chart of Tesla Motors (TSLA) provides us with two good lessons in technical analysis.

First let’s look at the candles themselves, especially that shooting star on November 15. It was a classic shooting star pattern, which wanted to warn us that the advance in prices from $22 was over. And that was true … for a few days. What happened? Did our shooting star lie to us?

It is important to remember that, as a 1-candle pattern, the shooting star can be less reliable than other patterns which take longer to develop. And it is always a good idea to consider other information on the chart, rather than reflexively reacting to individual signals. This is why many software packages which try to mechanically analyze candles do not work well.  On this particular chart, on the days following the shooting star we see some moderately long lower shadows making a series of higher lows. This tells me that there were still bulls out there buying shares whenever prices dipped below $30.

The second lesson here is that it is really a mistake to rely only on the candle patterns. Even experts on the topic do not do that. Here, our shooting star actually closed above the upper Bollinger band, and had been pummeling that band for some time. It is rare to see a sharp reversal in this situation. I note also that if this stock was reaching a euphoric climax we probably would have seen much more volume. The stock was very actively traded on the 15th, but it was actually less than on the previous two “up” days.

And how does it look now, with prices over $35? As TSLA ran up from $30 in the past week, it did so on lower volume. Likewise, the shares were not tagging the upper Bollinger band with the same vigor as they had been. I included ADX on the chart to remind that the trend is now at oxygen-deprived levels. So I would have my finger on the “Sell” button as the new week begins. Maybe we will even get a pretty candlestick pattern to make things easier for us.