When an Earnings Beat Fails to Reboot a Stock

Tesla (TSLA) is on a tear this year. And it is fast recouping last year’s huge losses.

Its July peak represented a 194% gain from its January low. The TSLA stock price doubled in the past couple of months alone.

However, as we saw yesterday with Microsoft (MSFT), TSLA’s rally has recently come under pressure.

Like MSFT, TSLA had its weighting in the Nasdaq Index reduced 1%. And TSLA’s Q2 earnings beat also failed to inspire the market.

So today, I want to see if TSLA can resume its rally…

Surging Momentum

On the left-hand side of the chart below, you can see the last leg of TSLA’s downtrend…

That leg started when the TSLA stock price and the Relative Strength Index (RSI) started heading in different directions (left orange lines).

By the time TSLA bottomed out in early January this year (‘A’), it had lost three-quarters of its value since November 2021:

Tesla (TSLA)

Source: eSignal

That fall stopped and reversed, though, with the RSI forming a ‘V’ and rallying (left red line) out of oversold territory (lower grey dashed line).

TSLA’s rally developed further as the RSI broke up through resistance (green line) and into the upper half of its range.

But that surge petered out and retraced. The RSI reversed from overbought territory (upper grey dashed line) in February.

From there, TSLA drifted lower as momentum steadily fell.

Then the RSI repeated its January pattern (right red line). And TSLA found a base at a higher low (‘B’) and resumed its rally.

That surge in buying momentum caused a huge rally from May onward.

Take another look:

Tesla (TSLA)

Source: eSignal

That surge also pushed the RSI way into overbought territory.

After TSLA retraced off its initial peak, though, it made two new higher highs (right upper orange line).

Yet the RSI was making lower highs (right lower orange line).

When momentum falls like this, it becomes increasingly difficult for a stock price to continue rallying.

And that is what we saw.

Despite TSLA’s Q2 earnings beating analysts’ expectations, TSLA dropped 15% in just a few days.

Now the RSI is testing support. So what am I looking for next?

Repeating Patterns

Well, right now I’m watching the RSI closely.

If the RSI can bounce off support, TSLA could resume its current rally.

We would then look for the 10-day Moving Average (MA, red line) to start accelerating above the 50-day MA (blue line) as confirmation of TSLA’s next up leg.

But even if the RSI falls through support, it doesn’t mean that TSLA’s rally is over…

When the RSI rallied out of oversold territory in January and May, it locked in the troughs at ‘A’ and ‘B’ – from which TSLA rallied.

If that pattern repeats and TSLA locks in a new higher low at ‘C,’ that would set TSLA up for the next leg of its rally.

Regards,

Larry Benedict
Editor, Trading With Larry Benedict

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