Tesla, Inc (NASDAQ: TSLA) was trading mostly flat on Friday in a tight range between about $1,001 and $1,017 after trading in a fairly tight range on Thursday
The two-day tight trading ranges have caused Tesla to develop a double inside bar pattern on the daily chart. An inside bar pattern indicates a period of consolidation and is usually followed by a continuation move in the direction of the current trend.
An inside bar pattern has more validity on larger time frames (four-hour chart or larger). The pattern has a minimum of two candlesticks and consists of a mother bar (the first candlestick in the pattern) followed by one or more subsequent candles. The subsequent candle(s) must be completely inside the range of the mother bar and each is called an “inside bar.”
A double, or triple inside bar can be more powerful than a single inside bar. After the break of an inside bar pattern, traders want to watch for high volume for confirmation the pattern was recognized.
- Bullish traders will want to search for inside bar patterns on stocks that are in an uptrend. Some traders may take a position during the inside bar prior to the break while other aggressive traders will take a position after the break of the pattern.
- For bearish traders, finding an inside bar pattern on a stock that’s in a downtrend will be key. Like bullish traders, bears have two options where to take a position to play the break of the pattern. For bearish traders, the pattern is invalidated if the stock rises above the highest range of the mother candle.
The Tesla Chart: Tesla’s double inside bar pattern leans bullish because the stock had soared up 37% between March 15 and March 23 before forming the pattern. The move higher was caused by Tesla printing a bullish double pattern at the $756 level on March 14 and March 15.
- On Friday, Tesla was trading on lower-than-average volume, indicating there is a lack of both buyers and sellers and the stock is consolidating. By mid-morning only about 5 million Tesla shares had exchanged hands compared to the 10-day average of 27.76 million.
- The consolidation is needed because Tesla’s relative strength index (RSI) is measuring at about 65%. When a stock’s RSI nears or reaches the 70% level it becomes overbought, which can be a sell signal for technical traders.
- Traders can watch for a break up or down from the mother bar later on Friday or on Monday to gauge the future direction. If the stock breaks to the downside, it may find support and reverse at the eight-day exponential moving average. If Tesla prints a reversal candlestick, such as a doji or hammer, near the level it may mark the higher low that’s needed to confirm an uptrend is in the cards while also providing a solid entry for bullish traders who are not already in a position.
- Tesla has resistance above at $1,045 and $1,075 and support below at $978 and $945.
Photo: Courtesy Tesla Inc
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