Tesla stock isn’t stomping, but we have a bullish number
When posting Ward’s Three Wave Theory, I wanted to both try to answer a myth and help people understand how a financial market moves from one price region to another. Because supposedly a Japanese A rice trader named Munehisa Honma had developed a system using candlesticks that enabled him to identify the future demand for rice in the 17th century.
I wrote an article on oil a few months ago for a commodity trading publication that asked how exactly Mr. Honma developed a method using candlesticks to identify a high probability in the future of the price rice, canceling all purchases in one area and moving on to the next region.
It’s a question no one seems to be asking as the financial world watches candlesticks circle a screen daily. Candlestick patterns are meant to be a way of predicting the future of price, with books and a list of all the different names on the subject available for our perusal.
Do we really think that Mr. Honma could get an accurate reading of the future price of rice from an abandoned baby? Maybe he could, maybe he was so good.
Elliott Wave Theory actually identified the answer in its attributions before it continued in complexity, with people using the theory often providing several different scenarios of where a market may land before claiming the answer. call if one of them knocks.
When I look at a chart, my main concern is where is the highest probability of what a financial market will do (exactly) and I wonder what Mr. Honma would think of my written take.
If we go back to the original Tesla (NASDAQ: TSLA) article I wrote for Seeking Alpha as an example, it claims that Tesla is in a bearish three wave pattern, which should land at $176 should wave a digital copy of wave three. It turns out Tesla has dipped in the $200 region so far, but following a stock split.
You see, a financial market cannot go up or down significantly without making what have been called (waves) in price. A wave one is a high or low that carries the price a certain length until it runs out. A wave two must then remain within the parameters of wave one, certainly in a bullish case not exceeding the low and a bearish case not exceeding the high. Wave two must form what is called a rejection, which in bullish form must be a bearish candle and bearish form must be a bullish candle as we can see above on the monthly Tesla chart before the stock split .
It is when this rejection candlestick is printed that it sets the stage for what is known as the third wave to break above or below waves one and two and carry the price to the next region, closing the carries to the previous price zone.
We have therefore identified our entry point as the point where the third wave breaks out, but how do we assess where exactly this new price has the highest probability of landing? I have argued that if a wave can be carried from one price range to another, then when the rejection has formed and beaten, the third wave will seek to print the exact same number before eventually finding its rejection. This can of course continue further, but we have no written evidence of this other than waiting for the market to form an additional three wave pattern in the same direction once the third wave has digitally replicated the first wave.
Since Tesla’s stock split in August, the fact remains that it’s impossible to get a reading from the monthly chart, so we’re forced to move to the weekly chart to try to identify wave patterns.
First, we can see in the graph above that Tesla had actually printed a miniature three-wave pattern highlighted by the green Fibonacci, which saw its third-wave target hit before continuing a little further and fall back into the structure.
So now it’s $225 to $312: what we’ll consider another wave, the first being the most recent low.
A prolonged second wave saw price revert to the initial breakout zone of the miniature third wave, a financial market will pretty much always revert to a breakout zone and this is another reason why I wrote the Theory of three waves because often a third wave will hit its set target before returning to the clearing area before making its next decision. We don’t have a crystal ball for his next decision, hence why we’re taking the entry and exit provided by the three-wave printed pattern.
If Tesla can hold above $208 and then break above $313, we can see that the technical target for this third wave is at $401. We can also see Fibonacci 261 and 423, but for now this is just a numerical preview.
Tesla can of course go lower, and it is not possible for the price to reach $176 from its initial macro bearish third wave target.
But staying above $208 and breaking above $313 will certainly increase the likelihood that Tesla has bottomed as we await a monthly candle reading to come. If Tesla goes above $313, it can hit the $400 region in 30-60 days and I call this article a technical hold until it does.