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CVS Health Corp (NYSE:CVS) shares are getting crushed because of the terrible earnings report from Walgreens Boot Alliance. Inc. (NASDAQ:WBA). Some investors fear CVS may experience some of the same issues that drove Walgreens lower.
It isn't a coincidence CVS found support right around the important $57.60 level. And it’s not surprising either. It's an illustration of an important market dynamic that savvy traders use to profit. This is why it's our Stock of the Day.
The best traders don't guess. They let the market tell them what to do. And the market “speaks” by how it reacts when an important price level has been reached.
Price levels that had previously been resistance can convert into support levels.
As seen on the chart, the $57.60 level was the top in May. And many people who sold there were happy they did so after the price fell lower.
CVS) found support at a level that was resistance." class="wp-image-409202" srcset="https://editorial-assets.benzinga.com/wp-content/uploads/2024/06/27115931/1-8-1024x596.png 1024w,https://editorial-assets.benzinga.com/wp-content/uploads/2024/06/27115931/1-8-300x175.png 300w,https://editorial-assets.benzinga.com/wp-content/uploads/2024/06/27115931/1-8-768x447.png 768w,https://editorial-assets.benzinga.com/wp-content/uploads/2024/06/27115931/1-8.png 1041w" sizes="(max-width: 1024px) 100vw, 1024px" />But then the stock ripped higher in early June and a number of these traders and investors started to think they made a mistake by selling. They decided to buy their shares back — but only at the same price they were sold.
So, it isn't a coincidence that CVS found support at this level. A large number of these remorseful sellers placed buy orders right around $57.60. This large concentration of orders was enough to absorb all the selling and put a floor under the shares.
Stocks tend to rally after they drop to support levels. This happens when some investors and traders who created the support with their buy orders become anxious.
They sense other buyers are coming into the market. That's why the price has stopped moving lower.
The sellers will go to whoever is willing to pay the highest price. Because some of these buyers don't want to miss the trade, they increase the prices they are willing to pay.
Others see this and do the same. And it could result in a bidding war to force the shares higher.
The ability to identify important prices levels for a stock is essential for successful trading. It helps to identify logical places to enter and exit positions.
Photo: Around the World Photos via Shutterstock
