Tesla Stock Drops Again. Blame This Sell Signal. – Barron’s

Tesla stock dropped on Monday because of a technical indicator.

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Tesla stock took it on the chin again Monday, this time an innocent victim of a bigger market force.

Shares of Tesla (ticker: TSLA) fell 2.3%, closing at $869.74, off for the fifth consecutive day. It’s the stock’s longest losing streak since Mar. 8, 2021, according to Dow Jones Market Data.

It would be so easy if Monday’s drop could be attributed to a fundamental factor such as demand or earnings. But it isn’t because the broader market was having a dismal day, too. The S&P 500 and Nasdaq Composite fell 2.1% and 2.6%, respectively. The Dow Jones Industrial Average fell 643 points, or 1.9%.

What was happening: Traders have shifted to a risk-off mentality. And the reason? A momentum indicator known as the MACD—moving average convergence/divergence—has turned negative.

MACD is a technical indicator used by traders to gauge market sentiment. It is, essentially, calculated by subtracting a longer-term moving average from a shorter-term moving average.

If, for example, a stock’s 50-day moving average was 90 and its 20-day moving average was 100, the MACD would be 10. Know that the actual calculations and time frames are a little different.

A positive MACD is good. But when that calculation goes negative, momentum for a stock, or a stock index, is fading. Katie Stockton, chartered market technician and Fairlead Strategies founder, has been warning of a negative reading for a couple of days.

Well, the MACD for the S&P 500 went negative on Monday. The MACD for Tesla went negative, too. Tesla’s MACD turned positive in May, about the time the stock hit a near-term bottom of roughly $630 a share.

That Tesla example makes trading sound easy—just follow the MACD to trading profits. It isn’t that easy, of course. Most trading indicators are more art then science. Still, knowing what traders are looking at can help any investors interpret what’s going on.

Looking ahead, what traders want is simple as it relates to the MACD signal: a positive number again.

Indicators tend to reflect reality instead of creating reality. Things turn around because something happens. Earnings can be the cause, or Fed-speak about the economy can sooth investor fears.

For traders, all those economic and fundamental data points get combined into trend-following signals they act on. For now, the MACD signal is flashing red.

MACD lines, along with other indicators, are available in Barrons.com advanced chart options.

Write to Al Root at allen.root@dowjones.com