Tesla Is Overbought But This Might Not Be Bad Even As Share Price Dropped By $150+ In Less Than An Hour Today

Ramish Zafar
Tesla's Model Y will prove important in the company's near-term future as it focuses efforts on Cybertruck and Semi development. (Image: Tesla)

This is not investment advice. The author has no position in any of the stocks mentioned. Wccftech.com has a disclosure and ethics policy.

Electric vehicle and renewable energy products manufacturer Tesla Inc (NASDAQ:TSLA) is soaring to new highs on the stock market as investors look forward to the company's crucial earnings report for the second quarter of 2020. Tesla beat analyst estimates for vehicle deliveries in a quarter that was marred by pandemic-induced lockdowns and purchasing power drops, and should the company consistently return bottom line profits over the next couple of quarters, then many speculate that it might become a part of the Standard and Poor 500 market index.

Given the stock's strong performance on the market today, it's time to look at technical indicators to gain a sense of whether this strong performance will extend or if it'll reverse.

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Even as it makes a strong entry into the third quarter, Tesla's vehicle delivery performance for the rest of the year is far from being uncertain. In fact, what just might be for certain is the company choosing to revise its self-set delivery target of half a million vehicles by the end of 2020 at its upcoming earnings release on the 22nd.

At noon today, Tesla's share price stood at $1,742/share as the stock reflected gains of roughly 13% over Friday's closing price. Yet, by 14:15 ET, the shares were trading at $1,536 as they lost all gains made during the day before once again picking up momentum. Judging by the stock's relative stock index (RSI) the shares have officially entered the overbought territory. However, before we get into the details, it's first important to briefly describe what the readings from this metric imply and what they do not imply.

The index uses price movements over a set interval to determine a stock's momentum and whether it is overbought or oversold. These values help traders make decisions about future trends in a stock price, but they do not necessarily 'predict' the price trend of a stock unless certain conditions are met. A reading of the RSI Index greater than 70 indicates that a stock is overbought and a reading below 30 implies that it is oversold, yet these two alone can not provide any major indications about future upward or downward price momentum.

Tesla's historic price movements plotted with the RSI Index (reading made at 13:20 ET today). Notice how the index mirrors share price movements; this is a crucial factor in determining future trends. (Image Credit: Koyfin)

Taking a look at Tesla's current RSI reading it's clear that the stock is in overbought territory owing to a score of 89 on the index that it has earned itself. Such a score is natural given the NASDAQ-100 index's current bullish trend and the similar trend exhibited by Tesla due to the reasons mentioned at the start of this piece. Readers are reminded to keep in mind that this score does not imply that Tesla is headed for downward price movement either.

This fact holds even stronger for Tesla as over the course of the last twelve months the stock has entered the overbought territory seven times and entered oversold territory (a score <30) only once. Additionally, since the current upward price movement exhibited by the Tesla shares is one of their strongest in history, it's entirely possible that they continue to trade higher.

Tesla's share price movements and its RSI Index (reading made at 13:20 ET today) have both shown significant correlation over the past twelve months. (Image Credit: Koyfin, alterations by Wccftech)

The big indicator when studying the RSI index and a stock's price movements that needs to be watched out for is the divergence of the price movement with the index score. So for instance, if a stock is witnessing upward price momentum yet its RSI value does not increase, then investors can possibly witness a price reversal where the equity loses its value and a shorting opportunity presents itself. The same applies to vice versa, and when looking at Tesla's historic movements for both the graphs above, it's clear that the stock's price movement and RSI reading have rarely diverged.

Since price movements for NASDAQ:TSLA are currently mirroring the stock's RSI readings, the cautious investor might need not to be so cautious about potential downward momentum. Wall Street analysts aren't – as evidenced by the myriad of price targets and analyst research notes that are currently making their way around on Wall Street.

However, if both of these graphs diverge then new trading opportunities can present themselves. Say if $TSLA sees its price go down but the RSI stays up then investors who buy the low will have the potential to see their shares go up in value.

For now, all eyes are on Tesla's upcoming earnings report for the second quarter of 2020 – when we'll find out if the company managed to turn a profit in one its toughest quarters to date. Additionally, the company's forecasts for its short term future will also provide investors with important insight into the state of the electric vehicle market and about Tesla's plans for targeting China, where it has shown impressive performance in the wake of the country's post-pandemic economic recovery.

Readers are advised to keep in mind that this article does not represent investment advice. Therefore, please conduct your own due diligence before making any investment decisions. The writer owns no shares of Tesla Inc at the time of publishing, and he does not intend to acquire any in the short term either.

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