Stock Of The Day: Here's Why The Nike Rally Stalled Out

Shares of NIKE, Inc. NKE are rallying after the company appointed Elliott Hill as its new CEO, aiming to rejuvenate sales by mending ties with retailers.

But as you can see on the chart, the shares ran into resistance around $88.50. This isn't a surprise. It's why our team of trading experts has made it our Stock of the Day.

There is resistance around the $88.50 level because it was support in April. Price levels that had previously been support can convert into resistance. This is a common occurrence not just in the stock market, but it all financial markets.

Technical analysis patterns can form on charts because of investor and trader psychology. Support turns into resistance due to regretful buyers.

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There are traders and investors who bought Nike when it was at the support in April. They thought they made the right decision when the stock moved higher soon after.

But in June the support was broken and the shares made a big move lower. When this happened, some of the people who purchased their shares at support came to regret their decisions to do so. At this point, they were losing money.

A number of these remorseful buyers decide to sell their shares. But they don't want to take a loss. As a result of this, when the stock got back to their buy price they placed sell orders. They are trying to get out of their positions at breakeven.

Because there was a large number of these sell orders, it caused resistance to form at the price that was.

As you can see on the chart, the same dynamic occurred at the $97.50 level. It was support in March. Then it converted into resistance in late June.

Sometimes stocks reverse and sell off after they reach a resistance level. This happens when some of the traders and investors who created the resistance with their sell orders become anxious.

They know that the buyers will go to whoever is willing to sell at the lowest price. They worry that other sellers will reduce the prices they are willing to sell at. So, they lower their offering prices. Other anxious sellers see this and do the same thing. It results in a snowball effect that forces the price lower.

Successful traders understand the psychology that causes patterns to form on charts. This allows them to profit.

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