Tesla Stock Fails to Hold Key Weekly Level After Earnings

Tesla, Inc. (TSLA) beat earnings per share (EPS) estimates on July 22. The stock gapped higher to $1,689.00 on July 23 and then opened this week below its weekly pivot at $1,580.50.

Tesla stock has been on a strong momentum run-up in 2020. The stock closed last week at $1,417.00, up 238.7% year to date and up 304.3% since trading as low as $350.51 on March 18. The stock is also in bear market territory at 21.1% below its all-time intraday high of $1,794.99 set on July 13.

The daily chart shows that Tesla stock has been above a golden cross since Nov. 7, and it tested its 200-day simple moving average at $370.50 on March 18 as a buying opportunity. When the stock tested its all-time high on July 13, its weekly stochastic reading was above 90.00, which was a warning that Tesla was in an "inflating parabolic bubble" formation and a signal to book profits.

Tesla is not an investment but is a trading stock. Its P/E ratio is 738.02 without offering a dividend, according to Macrotrends.

The daily chart for Tesla

The daily chart for Tesla shows that the stock has been above a golden cross since Nov. 7, when the 50-day simple moving average rose above the 200-day simple moving average to indicate that higher prices lie ahead. From a high of $968.99 on Feb. 4 to the low of $350.51 on March 18, the stock plunged by 63.8%. From this low to the July 13 high of $1,794.99, the stock skyrocketed by 412%.

From the 200-day simple moving average at $370.50 on March 18, the stock rose to its 50-day simple moving average at $647.06 on April 13. Tesla's annual pivot at $491.71 was a magnet between March 16 and April 3 as a buying opportunity.

The stock opened this week below its weekly pivot at $1,580.50. Its monthly, semiannual, quarterly, and annual value levels are $1,100.04, $757.46, $644.54, and $491.71, respectively.

The weekly chart for Tesla

The weekly chart for Tesla is positive but overbought, with the stock above its five-week modified moving average of $1,254.27. The stock is well above its 200-week simple moving average, or reversion to the mean, at $374.41.

The 12 x 3 x 3 weekly slow stochastic reading is projected to slip to 81.15 this week, down from 87.11 on July 24. At the July 13 high, this reading was above 90.00, putting the stock in an "inflating parabolic bubble" formation. This was followed by a quick decline.

Trading strategy: Buy Tesla stock on weakness to the monthly value level at $1,100.04 and reduce holdings on strength to its weekly risky level at $1,580.50.

How to use my value levels and risky levels: The stock's closing price on Dec. 31, 2019, was an input to my proprietary analytics. The annual levels remain on the charts. The monthly level for July was based upon the last nine monthly closes, the third quarter level was based upon the last nine quarterly closes, and the second half 2020 level was based upon the last nine mid-year closes. New weekly levels are calculated after the end of each week.

My theory is that nine years of volatility between closes are enough to assume that all possible bullish or bearish events for the stock are factored in. To capture share price volatility, investors should buy shares on weakness to a value level and reduce holdings on strength to a risky level. A pivot is a value level or risky level that was violated within its time horizon. Pivots act as magnets that have a high probability of being tested again before their time horizon expires.

How to use 12 x 3 x 3 weekly slow stochastic readings: My choice of using 12 x 3 x 3 weekly slow stochastic readings was based upon backtesting many methods of reading share-price momentum with the objective of finding the combination that resulted in the fewest false signals. I did this following the stock market crash of 1987, so I have been happy with the results for more than 30 years.

The stochastic reading covers the last 12 weeks of highs, lows, and closes for the stock. There is a raw calculation of the differences between the highest high and lowest low versus the closes. These levels are modified to a fast reading and a slow reading, and I found that the slow reading worked the best.

The stochastic reading scales between 00.00 and 100.00, with readings above 80.00 considered overbought and readings below 20.00 considered oversold. A reading above 90.00 is considered an "inflating parabolic bubble" formation, which is typically followed by a decline of 10% to 20% over the next three to five months. A reading below 10.00 is considered "too cheap to ignore," which is typically followed by gains of 10% to 20% over the next three to five months.

Disclosure: The author has no positions in any stocks mentioned and no plans to initiate any positions within the next 72 hours.