bearish indicators

3 Common Signals to Help You Predict Tesla's Next Price Crash

Do you know it's possible to predict a market crash through stock chart analysis?

Today SlashTraders will use Tesla stock as an example to show the 3 common bearish signals, so you can react to bearish trends easily.

How Do You Know a Stock Is Overvalued?

We can use Trefis to help us determine a stock's fair value. If we use TD Ameritrade's Analyse tab to look at TSLA's Fundamentals, we can see Trefis estimates Tesla to worth $391 per share.

Trefis estimates Tesla's fair value as $391.

We can read the TD Ameritrade chart to find the intervals where the stock price exceeded $390.

TSLA 390美元線
Use the $390 level to mark the interval where TSLA has been severely overvalued.

Now we know when TSLA is overvalued, we have the first bearish signal.

Use Bollinger Bands to Find Over Extended Prices

Bollinger Bands uses historical price data to model the statistical probability of future stock prices in a normal distribution. Its +/-2 standard deviation is a good reference to estimate the Implied Volatility to the stock.

normal distribution and standard deviations
Normal distribution is a statistic estimation of where the price will be.

There is only a 5% chance that a sample will occur outside +/-2 standard deviation (σ).

There is a 95% chance that prices would fluctuate between the Bollinger Bands.

When TSLA stock price exceeds the upper Bollinger Band, we can say the price has overextended, and there is a high probability that the price will correct downwards.

Tesla stock price moved beyond the Bollinger Bands on 2 occasions in the past year.

TSLA price moved beyond the Bollinger Bands a few times in the past year. If the price penetrated the Bollinger Bands in a upward move, there would be a high probability a downward correction would follow.

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Use RSI to Find the End of Overbought Conditions

RSI compares historical data with current price movements to determine whether the stock is in Overbought or Oversold conditions.

When RSI exceeds 70, the stock is Overbought and will likely continue to rise; while RSI is below 30, the stock is Oversold and will likely continue to fall.

RSI oversold and overbought conditions
We can use RSI to determine Overbought and Oversold conditions to predict price directions.

If the stock price stays Overbought for extended periods of time, we expect the stock price to fall after exiting Overbought conditions.

The RSI analysis of Tesla price fluctuations shows TSLA were Overbought for long periods in the last year. When Overbought ends, there is a high chance the stock will fall next.

After long periods of Overbought, there is a high chance of TSLA price falling.

Now we know the 3 common bearish signals, we can use them to estimate when the stock price will fall. In our experience, when at least 2 signals appear at the same time, there is a huge probability the stock price will crash next.

If we overlay the 3 bearish signals together, we can see TSLA satisfied at least 2 bearish signals in both the start and end of January.

combination of bearish signals
At least 2 bearish signals were present at both early and end of January.

As expected, Tesla stock price fell in a big way after the end of January.

Take Advantage of the Down Trend by Selling Call At the Resistance

Since we can use bearish signals to forecast a price drop, we can sell a Call option at the resistance to be profitable from a bearish trend.

Since TSLA's last high point was $900, that could be the resistance to a future price correction.

900 peak price resistance
TSLA's previous $900 high becomes the resistance for future upward trends.

We can take advantage of the end of Overbought in early February to sell a Call option at $900.

賣特斯拉的call options
Selling a $900 Call is a high probability trade.

If the TSLA price does not rise above $900 before the Call expires, we will collect the full premium of the trade.

High Probability Bearish Trades Right Now

The Bear Call Spread Screener uses chart analysis to find overvalued stocks with a high probability of a downward correction that we can sell Bear Call Spreads to open.

We want to find heavily overvalued underlying that have a high probability of going down.

  • The options screener uses fundamental analysis to calculate the Fair Value of the underlying then compare that with the Last value to find the potential Upside of the stock. When the Upside is less than -30%, we have high confidence in a bearish outlook.
  • Short Signal Price shows the topped out price from our technical analysis. So we know the stock price will not rise beyond this price in the short term.
  • Short Days indicate the number of trading days has passed since the last short signal. As soon as the short signal appears, there is a high probability of a bearish move.
  • We also need to avoid Ex-Dividend Date before options expiration. On one hand Ex-Dividend Date usually lead to rising prices and assignment. On the other hand, if you get assigned, you might need to pay dividends for shorting the stock.

Since we are strongly bearish about our trade, we can use -0.50 delta ATM Bear Call Spread to calculate Return on Capital. This gives us the highest return when we are right, and the lowest maximum loss if we are wrong.

So we can look at the screener for the best ATM Bear Call Spread ideas.

bear call spread columns
We sort Upside by descending order to find the most overvalued stocks, then use Short Days to find the most recent down-trending opportunities.

By combining Upside and Short Days, we see ENPH is one of the most overvalued stocks, and has a short signal 8 trading days ago. It doesn't have an Ex-Dividend Date coming up. So it has a high probability of a bearish trend.

bear call spread screener enph
We combine Upside and Short Days to find the ENPH as one of the best ATM Bear Call Spreads.

By checking the Enphase price trends, we confirm ENPH reached a high point at $220, similar to the Short Signal Price in our Bear Call Spread list, 8 trading days ago, and has been bearish ever since. We expect ENPH to stay below Short Signal Price in the short term.

enph short signal price trend
ENPH reached the Short Signal Price $220 8 trading days ago, and has been bearish since.

We can sell an ENPH ATM Call Spread option that expires in 35 days. If the ENPH stock price does not rise before expiration, we have the potential to profit 86% from the trade.

enph atm bear call spread
An ENPH ATM Call Spread option that expires in 35 days has the potential to profit 86% from the trade.

Now it's your turn to experiment with the tactics we shared today, and look for overvalued stocks to profit with a Call option.

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