Over the last few days, Elon Musk’s Tesla (TSLA) has gotten hit, and hit hard. After an all-time high close of $383 on June 23rd, the stock has gone down almost every day and the last three have been particularly brutal with falls of 2.5%, 7.2%, and 4.5% (as of the time of this writing). In the course of that decline, the 14-Day RSI (a measure of momentum) has crept closer to deeply oversold territory around 30, and as of this writing, it stood at 31.5, the lowest since September of last year. Many technicians like to look at extreme RSI readings as a way to gauge mean-reversion: it’s hard for an oversold stock to stay oversold for long periods of time.
In the case of TSLA, though, buying the dip because it’s created an oversold condition might not work. In the table below, we show average 1y forward returns for all periods since TSLA’s IPO. When a period has an RSI of less than the period listed, it is included in the average return calculation. So for all days (0.2% of the total) when TSLA has had an RSI less than 20, it’s generated an average 1y forward return of 91.3%. As shown, the sweet spot for TSLA returns has been when RSI has been neutral, and that’s when most of the trading days have taken place. While the current reading on RSI (31.5) doesn’t necessarily mean there are more big declines to come, there’s also no reason to get fired up about a great entry point based on how the stock has traded in the past.
Another shocking aspect of the table below relates to how strong a stock TSLA has been since its IPO seven years ago. For all eight of the different RSI categories shown, the worst 12-month return is 37.5% (under 30), while every other category has seen an average gain of at least 57%!
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