Tesla (TSLA) is the IBD Stock Of The Day, as the EV maker hit a fresh high but flashed several signals that investors might want to take some profits.
XIBD lays out 10 criteria for a climax top, which occurs after a stock has been rallying for months, like Tesla has been doing. One sign of climax action is usually not enough to end a stock's run. But multiple signs could be a warning that a stock is about to cool off. Tesla stock action notches six or seven of those criteria right now.
Tesla Stock Extended
Shares rallied 7.8% to 880.02 on the stock market today, hitting a record 884.49 intraday. Tesla stock is well extended from its 466 buy point, according to MarketSmith chart analysis.
In the last three days, TSLA stock has gapped up three times. Those stock jumps are seen as exhaustion gaps. They occur after a long run, when a stock opens above the prior day's high. Gap ups are usually a sign of strength at the beginning of a stock's run. But in the later stages of a meteoric rise, a series of gaps could precede a sharp drop.
Another sign: Tesla, an IBD Leaderboard stock, has jumped 32% in the past three weeks and 43% in the past five weeks. Both are in the 25% to 50% increase range, a criteria that IBD uses to evaluate if a stock is reaching its top.
Tesla stock climbed about 64 points on Friday, its biggest one-day point of its run, exceeding Thursday's 60-point rise. When a stock has its biggest one-day point gain after an extended run, it may be a warning that it has reached its peak.
When a stock goes straight up for seven or eight days in a row, or eight out of 10 days, it may also signal a pullback is imminent. Tesla stock is on an 11-day winning streak.
Sell Rules For Growth Stocks: Use A Climax Top To Convert Paper Gains Into Real Profits
Tesla's Excessive Stock Split
Excessive stock splits is another criteria. Tesla announced a 5-for-1 stock split on Aug. 12, in an era when splits have become rare. Shares skyrocketed on news of the Tesla stock split, which finally took place on Aug. 31. A few days later, Tesla suffered a big sell-off, helping to trigger the September correction.
Tesla stock is 151% above its 200-day moving average. Rising more than 100% above the long-term 200-day is another climax top signal.
Depending on which points you link, Tesla stock could be seen as piercing an upper channel line, yet another climax top signal. However, one could draw a channel line that TSLA stock has not broken above.
Tesla Deliveries At Record
Tesla's latest meteoric rise began in late November on news that it would join the S&P 500 index on Dec. 21, following several quarters of profitability. In the new year, Tesla stock has continued surging after reporting a record 18,570 vehicle deliveries in the fourth quarter. For the full year, Tesla delivered 499,550, just shy of its stated goal of 500,000.
But the EV maker faces increasing competition from China-based rivals Nio (NIO), Xpeng (XPEV) and Li Auto (LI). Among traditional automakers, Volkswagen (VWAGY), Ford (F) and General Motors (GM) are also making a big push into EVs.
Cheaper Tesla Model Y
Tesla late Thursday launched a cheaper version of its Model Y SUV, priced at $41,990. That's $8,000 cheaper than the prior base model, but comes with a substantially lower range. The Model Y SR is still significantly more expensive than similar electric vehicles like the Volkswagen (VLKAY) ID.4, which sells for $32,495, and Ford's Mustang Mach-E, which goes for $35,395, when a federal tax credit of $7,500 is factored in for both cars. Tesla, like GM, no longer qualifies for the tax credit, which is reserved for automakers until they hit sales of 200,000 vehicles.
What To Do Now?
Tesla stock may be near a climax top, though that doesn't mean it's at the very top. It could keep running higher over a few days before correcting. But it's almost impossible to nail the actual peak. It's not a bad idea to sell at least some shares into strength in what is likely near the top.
After today, the eight-week-hold rule expires on the November breakout, giving investors an extra reason to consider taking some profits.
After a climax run, stocks traditionally have struggled for extended periods. But Tesla had a prior climax-like top in February 2020, only to quickly bounce back with further massive runs.
Still, Tesla stock plunged from the split-adjusted peak 193.80 on Feb. 4 to 70.10 on March 18.
Follow Adelia Cellini Linecker on Twitter @IBD_Adelia.
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