Bearish Divergences: An Insight into Two Key Growth Stocks
A core principle of financial markets is the law of supply and demand. When more investors buy a particular stock rather than sell, the price increases and vice versa. The study of this investor behavior is known as technical analysis. Within this field, the distinct patterns that begin to emerge are termed as divergences. Particularly important to investors are the ones classified as bearish divergences.
Understanding Bearish Divergence
A bearish divergence occurs when the price of a security makes a new high, but the indicator being used to assess it illustrates a lower high. This discrepancy suggests a potential decrease in momentum and lapents the possibility for a trend reversal. In essence, it is a warning signal that the current upward trend may soon start to wane.
Bearish Divergences in Key Growth Stocks
Let’s delve into two major growth stocks presenting potential bearish divergences: Netflix and Tesla.
1. Netflix: The Streaming Giant
Over the past year, Netflix has seen an unprecedented surge in its subscriber base due to pandemic-induced lockdowns. As a growth stock, the company’s share price increased significantly. However, closer analysis reveals a troubling bearish divergence.
Despite Netflix’s stock attaining new highs, its relative strength index (RSI), a key momentum indicator, showed lower highs. This divergence between the rising price levels and the falling RSI may signify an upcoming reversal in the stock’s trend.
While it is not recommended to immediately offload Netflix shares based on this development, it is crucial for investors to keep an eye on future price movements and other technical indications before making any decision.
2. Tesla: The Electric Vehicle Leader
Tesla, another growth favorite, has seen its share price skyrocket over the past couple of years. The electric car company, led by the ambitious Elon Musk, has boosted investor confidence and has gained significant market share.
However, recently, a bearish divergence has begun to surface. Despite Tesla’s stock price marking record highs, there have been lower peaks in its moving average convergence divergence (MACD), one of the most reliable trading indicators.
This bearish divergence suggests that the buying force behind Tesla may soon begin to fall. While the stock has shown consistent strength, this signal could mean it might be time for investors to exercise caution.
The Role of Bearish Divergence
It is crucial to remember that a bearish divergence is not a direct signal to sell
