When trading a momentum name like Tesla, understanding technical patterns can be crucially important in determining the next move—especially when the stock approaches key levels. And the technicals tell us that Tesla is sitting at an important price level right now.
As the chart shows, Tesla is forming a textbook head and shoulders pattern, with $160 acting as the neckline.
A close below $160 would violate that neckline, and could lead to a torrent of selling as investors seek the next levels of support, which sit at $150, $140 and then $120. After that, the next level of support is at $100, which happens to coincide with the stock's 200-day moving average. That's the line in the sand. Below that, all bets are off.
The $100 level is an interesting for another reason. It's also tad above where founder Elon Musk raised $1 billion in a secondary offering back in May.
(Read more: Tesla hires Apple exec to develop new models)
But with that being said, I personally don't see Tesla hitting $100 anytime soon, and Tuesday's price action helped confirm that view. In heavy volume, Tesla broke through $160, but immediately bounced off its lows to close effectively flat.
If it can hold above $160, that would change the very-near term outlook. Anyone who bought Tuesday's dip down to $153 will be looking to unload at any sort of near-term resistance, which to me looks to be just below $173, where the 50-day moving average hits.
In the medium term, a trade down to $140 could be in the cards, as these vague reports about fires continue to plague the company and hurt the technical setup. But we'll learn a great deal more on Nov. 5, when the company reports earnings.
(Read more: Tesla's Elon Musk wants to make sub car a reality)
Options prices currently suggest the stock will move 14 percent in either direction on earnings, would would be slightly more than the average move of 12 percent over the past four quarters.