Shares of both Tesla Inc. and Netflix Inc. have recently fallen into correction territory, with charts suggesting that the selloffs are likely to continue for several weeks.
Tesla’s Stock Performance
Tesla’s stock (TSLA) experienced a slight increase of 0.1% in afternoon trading on Friday. However, it had dropped as much as 2.7% to an intraday low of $255.80, which was 12.8% below the 10-month closing high of $293.34 on July 18.
Netflix’s Stock Performance
Netflix shares (NFLX) fell 2.5% on Friday, trading 10.7% below the 18-month closing high of $477.59 on July 19.
Understanding Market Terminology
When the decline of a stock is up to 10% from a significant peak, it’s often referred to as a pullback. A correction is typically defined as a selloff of 10% to 20%. A bear market is typically characterized by a decline of 20% or more.
Investors React to Earnings Reports
Investors were taken aback by the late-Wednesday earnings reports from both companies, which can be seen in the downside gaps in the stock charts on Thursday. A gap decline occurs when a stock’s open is below the previous session’s close.
- Tesla’s stock opened at $279.56 on Thursday, below Wednesday’s close of $291.26.
- Netflix shares created a gap between Thursday’s open of $447.00 and Wednesday’s close of $477.59.
According to Katie Stockton, a technical analyst and founder of Fairlead Strategies LLC, these downside gaps, combined with the flattening out of the stocks’ 20-day moving averages (used to track shorter-term trends), indicate “signs of upside exhaustion.” Stockton believes it’s a strong enough indication to temporarily reduce exposure, predicting several weeks of corrective action for both stocks.
Technical Exhaustion in Stocks
In the past month, stocks have been trending higher and reaching new peaks. However, there are signs of technical exhaustion. The relative strength indexes (RSIs) of both stocks have already peaked at overbought levels in mid-June and have been declining since.
The RSI is a momentum indicator that measures recent gains against recent losses. When the RSI rises above the 70 level, it indicates an “overbought” condition. This suggests that historically, rallies of that magnitude have tended to tire out the bulls.
While overbought conditions can persist for long periods, the direction of the RSI in relation to the price often indicates a technical condition known as “bearish divergence.” When the RSI trends opposite to the price, the RSI’s direction is typically more accurate.
Read: Nvidia’s stock is the most overbought in 18 months, but that doesn’t mean the rally is over
If Tesla’s stock continues its descent, initial support is expected around the $243 level. As for Netflix shares, initial support is around $406.
In Tesla’s case, it’s important to watch for the widely followed 50-day moving average, which currently stands at $235.31. Additionally, the early-June breakout level defined by the February peak around $215 could provide support.
For Netflix, the late-May breakout level around the late-January/early-February peak in the $270 area could offer support.
Over the past three months, Tesla’s stock has surged by 59.5%, while Netflix’s stock has jumped by 30.1%. In comparison, the S&P 500 has advanced by 10.1%.
