Zinger Key Points
- Shares of ResMed (RMD) have been trading in a well-defined range.
- If they reach the bottom of the range again, a reversal and move higher may follow.
ResMed Inc. RMD shares are consolidating on Monday. This follows Friday's decline of more than 8%. The sell-off was driven by a disappointing earnings report.
Traders are waiting to see if ResMed drops to levels around $228.80. This is a support level and sometimes when a stock hits support, a reversal and move higher follows. As you can see on the chart, this happened the last time ResMed dropped to this price. This is why it's our Stock of the Day.
It may happen again. When a stock has been in a defined trading range, some traders like to sell if the shares reach the top of the range. Some like to buy at the bottom of the range.
The top of a range is called resistance. It is a price level where there is a large amount of sell interest. If a market is trending higher, there are more shares to be bought than there are to be sold.
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Buyers have to be willing to outbid others if they want to acquire shares. This forces it into an uptrend. When a stock reaches resistance, there are more than enough sell orders to fill all of the buy orders, so the uptrend ends.
Sometimes, stocks reverse and head lower after reaching resistance. This happened the last two times ResMed hit the resistance around $258. Anxious sellers undercut each other and it resulted in a snowball effect that pushed the price down.
Stocks can rally after they reach support. Support is a price level or range with large amounts of buy interest.
Sometimes, when a stock is close to support, some investors and traders who created the support get nervous. They know sellers will go to whoever wants to pay the highest price. They don't want to miss the trade, so they increase the prices they are willing to pay.
Other nervous buyers see this and do the same. It can result in a bidding war that forces the price up.
As you can see on the chart, this happened the last three times ResMed reached support around $228.80. It may be about to happen again.
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