I prefer to simplify the investment process as much as possible. I enjoy the straightforward and consistent application of technical analysis concepts which illuminate market dynamics.
To put it plainly, I like approaches that make things easier instead of making things more complicated.
With that in mind, I’m noticing that even while the market is in a bit of a “digestion” phase this week, there are a number of stocks that have bubbled up in my scan for new swing highs. These are names that are making new three-month highs, indicating that they may be early on in a new bullish phase.
Tesla (TSLA) is the first example, showing a clear rotation from distribution phase to accumulation phase.
What do I mean by “accumulation” and “distribution”?
Charles Dow, the father of technical analysis, defined an uptrend as a pattern of higher highs and higher lows. A downtrend is formed with lower highs and lower lows. By tracking the pattern of highs and lows, you can determine whether a chart is in an uptrend (accumulation phase, where investors are accumulating shares) or distribution phase (where investors are distributing shares).
TSLA showed a consistent pattern of higher highs until January, when there was a change of character on the chart. The stock then entered a consolidation period, where the range narrowed between 550 on the lower end and 700-750 on the upper end.
In the last couple weeks, the price has now rotated above the key 750 level of resistance, indicating a new accumulation phase. To me, that suggests the path of least resistance is higher.
Disney (DIS) is a little earlier on in the move, having shifted to the upper end of its trading range and now testing resistance at 185.
Disney popped up on my radar back in July as it neared its 200-day moving average. Even though there were a number of potential breakdowns of this key smoothing mechanism, we never saw any downside follow-through.
Now the stock is bumping against price resistance around 185 where it topped out in July and August. A break above this key price level should confirm a rotation to a new accumulation phase.
Finally, we have First Solar (FSLR).
Similar to Tesla, FSLR rallied strong into January 2021 but since then has been more rangebound. The stock slid off in February and March before bottoming out around $70.
In the last couple months, First Solar has pushed higher and finally broke above price resistance around $95 just this week. We now once again have a pattern of higher highs and higher lows. A new accumulation phase.
While many investors prefer to use complicated technical indicators and signals, I like to keep things simple. I feel most investors could improve their decision-making process by using simple trend-following methods like accumulation/distribution phases.
I recently recorded a video for my YouTube channel on TSLA including four potential future paths for the stock. Which do you see as most likely, and why?
PS- Ready to upgrade your investment process? Check out my free course on behavioral investing!
David Keller, CMT
Chief Market Strategist
David Keller, CMT is Chief Market Strategist at StockCharts.com, where he helps investors minimize behavioral biases through technical analysis. He is also President and Chief Strategist at Sierra Alpha Research LLC, a boutique investment research firm focused on managing risk through market awareness. He is a Past President of the Chartered Market Technician (CMT) Association and currently serves on the CMT Curriculum and Test Committee. David was formerly a Managing Director of Research at Fidelity Investments in Boston as well as a technical analysis specialist for Bloomberg in New York. You can follow his thinking at MarketMisbehavior.com, where he explores the relationship between behavioral psychology and the financial markets.
Disclaimer: This blog is for educational purposes only and should not be construed as financial advice. The ideas and strategies should never be used without first assessing your own personal and financial situation, or without consulting a financial professional.
The author does not have a position in mentioned securities at the time of publication. Any opinions expressed herein are solely those of the author, and do not in any way represent the views or opinions of any other person or entity.