As markets fall, here’s how a Tesla death cross might actually matter

Learn how a little technical analysis can help you understand the market a little better.

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Image source: Tesla

This article was originally published on All figures quoted in US dollars unless otherwise stated.

After a choppy start to the week, Thursday was a difficult day for the stock market. Once again, though, after seeing extremely large declines to start the day, markets rebounded to cut their losses by the end of the session. Declines for the Dow Jones Industrial Average (DJINDICES: ^DJI), S&P 500 (SNPINDEX: ^GSPC), and Nasdaq Composite (NASDAQINDEX: ^IXIC) were all less than 1% by the close.

Index Percentage Change Point Change
Dow (0.75%) (260)
S&P 500 (0.86%) (36)
Nasdaq Composite (0.72%) (105

Data source: Yahoo! Finance.

Shares of Tesla (NASDAQ: TSLA) were up a bit more than 1% on Thursday, as investors seemed generally pleased with the fact that the electric-auto manufacturer delivered roughly 33,000 vehicles from its production facilities in China during June and came out with a cheaper version of its Model Y SUV for Chinese consumers. Yet what’s getting more attention than you might expect is that the stock appears ready to go through what’s called a “death cross” — with plenty of ominous overtones.

Below, we’ll look more closely at what a death cross is and why even those investors who typically don’t pay any attention to technical analysis of the stock market should pay attention.

The basics of the death cross

Technical analysts pay close attention to the price behavior of stocks, and one common metric involves moving averages of past prices. By taking closing prices over a certain number of days, volatility gets smoothed out, giving a better sense of the general direction in which a stock is moving.

To determine relatively long-term trends of stocks, technical analysis often turns to the 200-day moving average of closing stock prices. For traders interested in short-term swings, the 50-day moving average is a popular gauge.

Some investors using technical analysis pay close attention when these two moving averages cross each other. When the 50-day moving average moves above the 200-day, then a so-called “golden cross” occurs, which many see as having bullish implications. When the 50-day moves below the 200-day, however, the result is a death cross, and that’s often seen as bearish.

Barring a quick jump of roughly $100 per share for the stock, Tesla is about to undergo a death cross for the first time in a couple years. That has some technical analysts nervous about the stock’s future prospects.

Should you really care?

If you’re wondering what all this has to do with Tesla’s actual EV business, the answer is absolutely nothing. For investors who focus solely on company fundamentals when deciding whether to make an investment, chart patterns have very little impact on long-term stock performance.

However, it can be useful for investors to be aware of technical-analysis issues, even if they don’t really believe in them. Enough investors do follow technical analysis, so in some cases, it becomes a self-fulfilling prophecy in the short run.

If you’re looking to make a new investment in Tesla — or you’re thinking about trimming a position you already have — then knowing that investors are more likely than not to react negatively when the death cross occurs can be helpful. If you’re looking to sell, you might choose to do so sooner rather than later. If you’re looking to buy, waiting for a death-cross-related downturn could allow you to purchase more shares with the same amount of money.

Most importantly, just knowing what other investors are looking at can help you understand — and likely dismiss — any short-term volatility the future might bring. For those who see Tesla as a fundamentally strong business with huge growth opportunities, any downturn could be an opportunity to invest more in the EV giant.

This article was originally published on All figures quoted in US dollars unless otherwise stated.

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Dan Caplinger has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of and has recommended Tesla. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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