Stock Of The Day: Is Analog Devices Due For Breakout Or Breakdown?

Trading in Analog Devices, Inc. ADI is flat Thursday. This follows yesterday’s gain of over 21% which was driven by an earnings release.

It isn't a surprise the rally stalled out where it did. Stocks frequently hit resistance at price levels that had been resistance before. That's the case with Analog and the $242 level.

Good traders can recognize which price levels are important in markets. They know that when a stock reaches one of these levels, the tendency is for them to either reverse, break out, or break down. These are called support and resistance levels.

Back in May when ADI reached $242, the sellers came out of the woodwork. They overpowered the buyers and pushed the price lower.

When this happened, many of the traders and investors who bought shares around $242 came to believe their decision to buy was a mistake. Some of them decided to sell their shares, but they didn't want to lose money.

As a result, they made the decision to hold onto their shares and eventually sell if they can get out at breakeven. So, when the stock returned to $242.00 in July they placed sell orders. This large concentration of these orders created resistance at the same price that had been resistance before.

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Now that the price has returned to this level, a similar dynamic is occurring. People who bought shares around $242 in July are placing sell orders so they can finally exit the position at breakeven. Buyer remorse has once again caused resistance to form at a price that had previously been resistance.

When stocks reach important resistance levels, they tend not to stay at them for an extended period of time. They tend to either reverse and sell off, or break out and move higher.

This is why Analog is on the radar screen of many traders as a possible idea.

If the resistance breaks and the shares move higher, this will mean that the sellers have left the market. They have finished or canceled.  This could be a setup for another bullish move.

If buyers enter the market, they may have a tough time finding someone to buy shares from. They may need to push the price higher to draw sellers back into the market. This could force an uptrend to form.

If the resistance doesn't break, sellers may fear missing out and reduce the prices they are willing to sell for. If they start to undercut each other this could force a downtrend to form.

Important price levels are like a fork in the road. When stocks reach them, they tend to go one way or another. Some savvy traders are waiting to see which way Analog Devices will trend before they take positions.

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