If understood and applied correctly, Technical Analysis is the study of investor and trader psychology. Successful traders understand that emotions make technical analysis patterns appear on charts.
Some of these graphical illustrations of emotions and psychology can be seen on the chart of Tesla, Inc. TSLA. This is why our team of technical analysts has made it our Stock Of The Day.
For example, as you can see on the chart, since July the $266 level has been resistance for Tesla.
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When a market is trending higher, there aren't enough sell orders to fill all of the buy orders. To draw sellers into the market, the buyers must be willing to bid premiums and pay higher prices. This can force the stock into an uptrend.
When a stock reaches resistance, as Tesla did in July, the tide turns. There is more than enough supply to fill all of the demand. Traders can buy as many shares as they wish without moving the price higher.
Sometimes after a stock reaches resistance, the sellers can overpower the buyers and push the price lower. When this happens, a number of the traders who bought shares at the resistance level regret doing so and decide to sell.
But they will only do this if they can do so without losing money. As a result, they decide to be patient and wait for the stock to eventually return to their buy price. If and when this happens, they can sell at breakeven.
This is why Tesla hit resistance once again around $266.00 in September. A number of the traders who regretted buying in July placed sell orders there. And there were so many of these orders that it caused resistance to form at the level again.
As you can also see on the chart, Tesla recently hit resistance there once again. A similar dynamic occurred. Remorseful buyers placed enough sell orders to create resistance around $266.00 for the third time this year.
Savvy traders know that resistance can form at the same price that had been resistance before due to ‘buyer's remorse'. If a trader is considering where to sell a stock, it may make sense to do so if it reaches a level that had been resistance previously.
There is a good chance that it stalls out again. It may even reverse and head lower.
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