TSLA Tesla Motors – Potential Island Reversal Top Chart Pattern

by Olivier on September 23, 2014

The chart of TSLA – Tesla Motors is starting to look worrisome. I see a lot of red flags and the potential for a climax run that has recently been completed with an Island Reversal Top pattern. Prior to leaving the island reversal we can see three pushes higher that often end climax runs. this pattern is called ‘Three Little Indians’ a term coined by Market Wizard Linda Bradford Raschke.

I highly recommend reviewing Linda Bradford Raschke’s Trading Rules. The run higher was accomplished on ever decreasing volume creating a negative divergence. Negative divergences in and of themselves are not a sell signal. But they raise a red flag. The last price high shows bearish topping tails and two gaps ‘separating’ them from the rest of the chart thus creating an ‘Island Reversal’. The gaps are simply indicating traders within the island are completely trapped. In this case the Island Reversal duration was very short, trapping only relatively few traders, still the bearish implications are the same.

Another very bearish ‘indicator’, which I believe I haven’t talked about on my website so far, is something I have noticed over the past 16 years I have been trading. Often times a huge run ends more or less exactly when a stock has increased ten-fold. It is uncanny how often that happens. Now don’t get me wrong, you do not short something simply because it has gone up 10-fold. But if you have serious evidence a top might be in place this is simply another tool in the box you can use. It is something I always keep in mind when I analyze charts displaying parabolic moves. With TSLA the mid-price of the range prior to the run-up is roughly 30$. The recent all time high was very close to 300$ so that qualifies for a ten-fold increase. This is simply an observation. Ultimately my stop buy will take care of everything in case my assumptions are wrong. I am currently short TSLA.

Click on weekly TSLA chart to enlarge:

When the ship starts to sink, don’t pray – jump! – Linda Bradford Raschke

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