For many of my friends with millions of dollars invested in Tesla and busy day jobs, it makes sense for them to buy and hold. Maybe sprinkle in some covered calls or buy puts as insurance from time to time. Guys like me though, who have much smaller bank rolls, more time on my hands, and a deep fascination with phycology and technical analysis, prefer to trade tsla in hopes of making more during rallies while avoiding downside risk.
From my experience, the most money and the highest success rate will be made trading with the trend and identifying reversal points. So how do you identify the direction of the trend and how do you know when it has reversed? Here's my 2 sense:
There are small trends inside of bigger trends inside of even bigger trends. Most people know that, but what they may not know is which trend they are going to trade.
Just before P&D (4/2/23) I mistakenly traded the short-term uptrend despite the larger trend still pointing down. The larger trend is more powerful until it’s broken.
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To identify the trend, I like using candle setups, moving averages, and trendlines. Any indicator that the stock has recently respected should be used. If the SP hits a trendline and immediately shows support/resistance that is a well respected trendline. That trendline should then be monitored closely. Same is true of moving averages.
There are times the SP is not respecting a trendline or moving average. The SP acts like they don’t exist and it goes above and below them with ease. Times like these I don’t pay much mind to the indicator since they aren’t well respected. Here’s an example during the Nov-Dec 2022 fall where the daily 21 EMA was well respected until it broke in Jan 2023.
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To identify when a trend may have reversed or is coming to an end, I like using candle setups, RSI divergences, and volume. Reversal candles are really the first major sign of a trend reversal. Most recently on Dec 28th, 2023 we had a daily bearish engulfing candle after an 8-week uptrend that kicked off the downtrend we are currently in. If there was a hierarchy of reversal candles, the 1 day reversal and engulfing candle are at the top of the list.
Divergences are a great tool to identify when the trend may be approaching its end. Pair this with trendlines and volume and predicting some moves starts to seem too good to be true. At the end of the last major uptrend in Dec 2023, we had massive bearish divergence on the hourly time frames as we approached key trendline resistance.
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Higher volume and/or a gap up/down on the day after the reversal candle is another key sign of a reversal. For example, Jan 9th, 2023 the SP gaped up the day after a 1-day reversal formed. Or on July 20th, 2023 the SP gaped down after hitting the strong downtrend leading back to its ATH. I also like to see volume increasing towards the end of a trend.
After a prolonged up or downtrend, if unsure if the trend has reversed ask yourself these questions:
- Has there been a significant reversal candle both on the weekly and daily chart?
- Has the stock reached a well-respected long-term moving average or trendline?
- Has volume been significantly increasing towards the bottom both on weekly and daily?
- Have any divergences occurred?
- This point by itself is not a signal of a reversal and should only be used in combination with other factors. Divergences can last for several weeks, even months past when they first begin to form. Even then they aren’t a sign the SP has reversed, rather a warning.
After a questionable reversal, if you are still unsure ask yourself:
- Has the SP broken a well-respected trendline or moving average in the direction of the trend you believe may have been reversed?
- Did volume increase during that break? (For example, Jan 23rd, 2023 when SP gaped up and volume increased following breaking the well respected 21 EMA. Or on Jan 3rd, 2024 when SP gaped down and volume increased after SP broke the well-respected uptrend line.
- What is the bigger picture telling you?
When in doubt, wait and do nothing. The chart will provide more data soon enough.