‘Vastly technically disconnected’: A market strategist breaks down the 3 indicators that show Tesla is overpriced — and says it’s due for a 17% correction in the next 6 weeks

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Shares of Tesla have gone on a blistering vertical tear over the last two months following their inclusion in the S&P 500 index and a stock split.

The stock has long had its critics when it comes to its valuation and fundamentals. 

But from a purely technical perspective, some indicators are showing Tesla’s current hot stretch may be due to end in the weeks ahead.

That’s according to Sven Henrich, a market strategist and technical analyst who is the founder of NorthmanTrader.

“Obviously the stock is in a massive upturn. It’s also vastly technically disconnected,” Henrich told Business Insider on Tuesday. 

Henrich is calling for a roughly 17% correction in the stock, a view stemming from his analysis. That would put the stock at levels it hit during intraday trading on January 4, between about $710 and $720.

While technical analysis uses historical patterns and charted data to forecast stock moves, it is only one of several ways to analyze stock prices. Company fundamentals and investor sentiment are also powerful drivers of price action, and the latter is particularly relevant to Tesla.    

With that in mind, below are the three indicators he’s looking at that are informing his call.

3 indicators that say Tesla is due for a correction

Henrich said the first indication that Tesla is in store for a sizable drop is its disconnect on a monthly performance chart from its five-day exponential moving average, or 5EMA, which gives more weight to the most recent prices.

“The monthly 5EMA is the key moving average, and the stocks may disconnect from them to the upside or to the downside for a short period of time, but it always reverts, it always rebalances in some way,” Henrich said on Tuesday. “And right now the stock — what is it trading at, $860? — the 5EMA is currently at $634. So you’re looking at a 16-17% disconnect on the monthly 5EMA.”

He continued: “Watch that monthly 5EMA: if that breaks, that would be suggestive that things are maybe changing quickly. But given how far that 5EMA is, that in itself would be a fairly sizable corrective move.”

He said this indicator correctly predicted Tesla’s pullback in September.

Below is the chart Henrich is looking at, with the 5EMA represented by the red line: 

While the difference between $860 and $634 is about 26%, Henrich said the 16-17% disconnect he references is due to the fact that the monthly 5EMA will continue to rise in the days ahead until the stock eventually corrects.

The next indicator that Henrich is watching, shown at the top of the above chart, is the RSI, or relative strength index. It measures extremes in price action on a scale of 1-100. Tesla is above 70, implying it is overbought and likely due for a pullback. 

But Henrich is more focused on the negative divergence in its RSI. In other words, while Tesla is posting all-time-high prices, its RSI is not reaching highs — another sign it’s due for a pullback, he said.

Finally, Henrich is looking at Tesla’s wedge trend, illustrated …read more

Source:: Business Insider