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When stocks rally, they tend to run into resistance if they reach a price level that had been resistance before. And sometimes, after hitting it they reverse and head lower.
As you can see on the chart, this is what just happened with shares of Eli Lilly and Co (NYSE:LLY). This is why our team of trading experts have made it our Stock of the Day.
When a stock is moving higher, it is out of equilibrium. There is more demand (buy orders) than there is supply (sell orders). As a result, if they want to acquire shares, the buyers are forced to pay successively higher prices. This makes the stock move higher.
When a stock reaches resistance the situation changes. There are enough sell orders to fill all of the buy orders so it stops moving higher.
In July, Eli Lilly hit resistance when it reached the $955 level. Then after a sell-off and reversal, it ran into resistance again at the same price in August.
There is a reason why this happened.
Many of the people who bought Lilly when it was at resistance in July regretted their decision to do so when the price moved lower. A number of these disappointed buyers decided to sell their shares.
But they didn't want to lose any money. So, when the stock returned to this level they sold their shares. This allowed them to exit the position at breakeven. This large concentration of sell orders formed resistance again at the $955 level.
Sometimes stocks reverse and head lower after they reach resistance. This is the case here.
Stocks sell off of resistance because some traders and investors who created the resistance with their sell orders start to undercut each other. They are afraid they'll miss out.
They know that the buyers will go to whoever is willing to sell at the lowest price. So, they reduce the prices they are willing to sell. Others who wish to sell see this and do the same thing. It results in a snowball effect that pushes the price lower.
Successful traders understand how important investor and trader psychology is. This allows them to identify important price levels and new trends that are forming. This leads to profits.
Photo: rafapress on Shutterstock
Posted In: LLY
