It's one thing to dress up as a ghoul for Halloween but when it comes to investments, one should try to avoid terrifying stocks. According to one of the greatest technical analysts of all time, there's one stock chart that's particularly bloodcurdling: Tesla.
John Bollinger is the developer of Bollinger Bands, one of the most important indicators in charting a stock. Since their invention three decades ago, Bollinger Bands have become an integral tool for practitioners of technical analysis.
Bollinger Bands are not easy to calculate by hand but most major stock charts, such as those on Yahoo! Finance, include them. (For a detailed discussion on the math behind Bollinger Bands, visit BollingerBands.com's very in-depth tutorial here.)
Here's how John Bollinger recently explained Bollinger Bands to Talking Numbers:
"The Bands are actually quite simple. There are three lines: the middle band defines the trend, whether stocks (or futures or forex or whatever) are rising or falling. And the upper band and lower band define whether prices are relatively high or relatively low. So, by definition, prices are relatively high on the upper band and they're relatively low at the lower band. You can use that information in pattern recognition or to compare price action to indicators and to arrive at rigorous investment decisions."
Bollinger has applied his invention to Tesla, one of the hottest stocks all year. However, while shares in the electric automaker have nearly quadrupled this year, they're down 15% in the month of October. That's just the start of a bigger decline, according to Bollinger.
"Tesla's simply a stock that went too far, too fast," says Bollinger. "With Tesla, it's time for a pause to refresh."
In his interview with Talking Numbers, Bollinger lays out the case for why he believes Tesla is headed down to perhaps as low as $120 per share, a 27% decline from where it is today.
"It's Halloween time and people are looking for scary charts," says Bollinger. "This is, in fact, a scary chart."
To see Bollinger's analysis of Tesla and why he thinks it's scary, watch the video above.
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