The Ichimoku Cloud says remain bullish on Tesla stock: analyst

·2-min read

Tesla (TSLA) stock fell 12% this week — it's the second worst weekly performance in a year. But it did manage to settle above a key price area watched by traders. Even if price breaks to the downside, a relatively obscure technical indicator suggests Tesla is maintaining its long-term bullish trend.

"For Tesla, the trend is higher based on that cloud — or shaded area on the chart," says Katie Stockton, founder and managing partner of Fairlead Strategies, during a Yahoo Finance Plus on Wednesday. She's referring to one component of the Ichimoku Cloud indicator, which is used to help determine potential support and resistance, in the weekly candlestick chart below.

Tesla daily candlestick chart with Ichimoku cloud
Tesla daily candlestick chart with Ichimoku cloud

The Ichimoku Cloud is composed of two lines, Leading Span A and Leading Span B, which are then shaded. Most traders focus on the two cloud lines, though there are six total components of the indicator, which was developed by Goichi Hosoda in the 1960s through tireless, manual backtesting.

Stockton explains, "It's not really a black box, but it's created in a way that's derived from midpoints of price. So it's a little bit convoluted in its construction. But better picture it as — almost like a MACD [Moving Average Convergence Divergence] indicator that's been lifted from its own window and plopped on the chart there. And it tends to attract price, but then we can use it as a way to understand support and resistance."

Stockton notes the upper end of the cloud is quite far from the current price, and we shouldn't expect Tesla to drop like a stone into it. "We don't look at it as really a magnet except to say that going forward, it does rise over time, and it does suggest that Tesla maintains its long-term uptrend," she says.

Based on the chart, by the beginning of July, the cloud will have risen to the current price, which could then provide potential support all the way down to the lower end of the cloud, just under $500. If price broke below from there, the cloud would be viewed as potential resistance.

In the short term, Tesla needs to respect its 40-week moving average (purple in the chart), which closely tracks the 200-day moving average. There's also another nearby level that Stockton wants to see respected by price closing above it two trading days in a row.

"There's a Fibonacci Retracement level around 583 that we really want to see hold on a consecutive closing basis. So here too, we're in that wait and see mode, let's let it discover support. But ultimately, we expect to be able to defer to that cloud-based support and guidance in terms of the long-term trend for Tesla," she says.

Catch the entire 45-minute Yahoo Finance Plus webinar below.

Jared Blikre is an anchor and reporter focused on the markets on Yahoo Finance Live. Follow him @SPYJared