Tesla shares are expected to correct before new wave of growth

Since early fall, Tesla (TSLA) stock has gained more than 35%. During yesterday’s trading session, the share price reached a new yearly high, surpassing the previous peak of slightly below $440 recorded in January. However, it failed to close at this level. Additionally, a long upper shadow emerged on the daily chart. This is a clear signal to take profits on long positions. As a result, TSLA could drop to $400. This corrective move provides a good opportunity to purchase Tesla shares at a more favorable price.

The current technical setup also points to a high probability of a correction. The RSI has entered overbought territory for the first time since May, while the Stochastic lines have already crossed over, reversing downward. At the same time, Tesla stock keeps going up on the chart, suggesting a high likelihood of a rebound after a local correction. Bulls have one more target near last December's peak of $490.

On Monday, surging interest in the tech company’s stock was driven by two events. The first is Piper Sandler raising its price target for Tesla from $400 to $500. The investment firm’s analysts interviewed Elon Musk’s business competitors from China, such as Xiaomi, Li Auto, and Leapmotor. Based on the findings, these firms have caught up to or even surpassed Tesla in terms of standard electric vehicle technologies but are still lagging behind in the areas of artificial intelligence (AI) and autonomous driving.

Another trigger was Berkshire Hathaway's sale of its stake in BYD, a leading electric automaker in China, which it acquired back in 2008. The investment has returned about 3,900% since then. However, Warren Buffett's company has now pulled out of BYD securities, and many retail investors may follow this example. Although the reason behind this decision remains unknown, market players may interpret it as a sign of a worsening outlook for the Chinese tech giant. This could raise Tesla’s appeal.

Keep the following trading strategy in mind:

Buy TSLA when the price declines to $400. Take profit: $440. Stop loss: $370.