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When stocks are moving higher, the markets are full of remorseful sellers. These investors and traders regret selling their stocks after the price eventually moves higher.
This psychology can be seen in charts. It is a common dynamic in the financial markets. That's why our team of expert traders and technical analysts have picked Morgan Stanley (NYSE:MS) to be our Stock of the Day.
As you can see on the following chart, the $94.00 level was resistance for Morgan Stanley in January, March, and April. In May, the resistance broke and the shares moved higher.
But then the shares reversed and made it back down to $94.00 in June. At this point, the level that had previously been resistance converted into a support level. Then the price moved higher.
Levels that were resistance can convert into support because of seller's remorse. Many of the investors and traders who sold Morgan Stanley when it was at $94.00 came to regret their decision to do so.
A number of them decided to buy their shares back at the price they were for sold at.
So, when the shares got back down to $94.00 many of these remorseful sellers placed buy orders. And the large concentration of these orders created support at the level that had previously been resistance.
Now traders will be focusing on the $102.00 level. It was resistance in May. Now the shares are trading above it.
If the stock eventually reverses and gets back down to $102.00, it may become a support level. And if it does it should set the stage for a new move higher.
Stocks don't go up in straight lines. An uptrend is like a staircase of trading ranges. And what was the top of one range (resistance) becomes the bottom of the next range (support).
But if there isn't support around $102.00, traders will say the stock has made a ‘false breakout'. This is important because false breakouts tend to proceed big moves lower.
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Posted In: MS
