Stock Of The Day: Is JPMorgan About To Head Lower?

Many practitioners misunderstand technical analysis. They look for patterns on charts without understanding the price action that makes these patterns form.

If understood and applied correctly, technical analysis is the study of supply and demand and trader psychology. One of the most important aspects of the analysis is identifying important price levels. As you can see on the chart of JPMorgan Chase & Co. NYSE, the $205 is certainly one of them. That's why it's our Stock of the Day.

As you can see on the chart, in May this level was resistance. Before reaching it, buyers had to take the price higher in order to get sellers interested. But when the shares reached $205 the sellers overpowered the buyers and knocked the stock lower.

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In early July the resistance broke, and the stock moved higher. Then there was some profit-taking which forced the price down and $205.00 turned into a support level.

This happened because many of the traders and investors who sold at $205.00 came to regret their decision to do so when the price went higher. A number of these remorseful sellers decided to buy their shares back.

But they would only do so if they can purchase them for the same price they were sold at. As a result, they placed buy orders around $205. And there were so many of these orders that it converted what was resistance into support.

Then on Aug. 1, the stock broke the support and the price moved lower. When this happened, many of the traders and investors who bought shares at $205 came to regret their decision to do so.

Many vowed to get out of their positions in JPMorgan, but only if they could do so without losing any money. So, now that the shares have rallied back up to this important level, these remorseful buyers are placing sell orders.

And there are so many of these sell orders that the level that had been support has converted back into a resistance level.

One of the most important aspects of technical analysis is identifying important price levels. Stocks tend to reverse when they reach them, and this could lead savvy traders to profits.

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