Stock Of The Day: Is The Move Higher In Discover Over?

The stock of Discover Financial Services DFS is trading lower on Tuesday. This comes after yesterday's gain of more than 7.5%. Analysts attribute the move higher to the company's announcement that interim CEO J. Michael Shepherd agreed to stay on until the completion of Capital One Financial Corporation's COF purchase of Discover.

The move higher stalled when Discover reached levels around $170.50. There is resistance around this price, which is why our technical analysis team has made it our Stock of the Day.

Resistance is a price or a zone with a large amount of sell interest.

If a stock is trending higher, there aren't enough sell orders to complete or fill all the buy orders. Investors and traders who wish to purchase shares are forced to outbid other buyers to complete their orders, forcing the stock into an uptrend.

The dynamic is different at a resistance level. There is the same amount or maybe even more shares for sale than there is to buy. This is why rallies pause or end when they reach resistance.

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It's not a coincidence that there is resistance around $170.50. As you can see on the chart below, this level was support in November. Then it was support in January and February.

Price levels that had previously been support can convert into resistance. This is a common occurrence not just in the stock market, but in all financial markets.

It is due to human emotion.

Many of the investors and traders who bought shares of Discover while it was at support were happy when the stock rallied soon after. They thought their decision to buy was a good one.

But when the support broke in early March, many of them came to regret buying because when this happened their winning positions turned into losing ones. Some decided to hold onto their shares but they also decided that if they could eventually sell them at breakeven, they would.

As a result, when Discover returned back up to this price they placed sell orders. The large concentration of these orders converted the support level into resistance.

If a stock is rallying and someone is trying to determine at what price to sell at, placing their orders at a price that had previously been support would be a logical thing to do. There is a good chance it will become resistance.

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