Stock Of The Day: Royal Caribbean Rally Could End At This Price

Royal Caribbean Cruises Ltd. RCL stock is rebounding today. This comes after yesterday's sell-off of 7.3%. The company will be reporting its first-quarter results on Friday.

Royal Caribbean is our Stock of the Day.

Some people are proponents of the Random Walk Theory. This theory states stock prices are random. This means past movements and trends cannot be used to predict a stock's future movement.

Random Walk also says it is impossible for an investor to beat the market.

This theory is easily proved to be false. If it was true, every price level in the market would have the same amount of importance. Support and resistance levels would not exist. But clearly, they do.

This can be seen on the chart of Royal Caribbean.

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The stock recently rallied. But the rally ended when it ran into resistance — or a large group of sellers — around the $220 level.

This wasn't a coincidence. The price action wasn't random at all.

The reason why there was resistance at this level is because it had previously been a support level. Support levels converting into resistance levels is a common occurrence in the stock market.

It is because some of the people who bought shares around $220 in January came to think they made a mistake when the support broke on March 6 and the price fell lower. Many of them decided to hold onto their losing positions. But they vowed to sell if they could eventually do so at breakeven.

As a result, when Royal Caribbean rallied back up to $220, these remorseful buyers flooded the market with sell orders. The large amount of these orders formed resistance at the same price that had previously been support.

It wasn't random.

If Royal Caribbean continues to move higher, there is a good chance it could stall out around $220 again. Savvy traders know that a level that has been important in the past can become so again in the future.

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Courtesy: Royal Caribbean