Stock Of The Day: AES Hovers Near Resistance — Will It Break Out Or Reverse?

Trading in The AES Corporation AES is quiet on Friday. But that may not be the case for long, as the stock is testing resistance.

When a stock is at resistance it tends to break out and head higher or reverse and head lower. It tends not to stay at the resistance for too long. This is why our team of expert traders has made AES our Stock of the Day.

Resistance is a price level or zone where there is a large amount of sell interest.

If a stock is trending higher, there aren't enough sell orders to fill all of the buy orders. Traders and investors who wish to purchase shares are forced to outbid each other and pay premiums. This forces the stock into an uptrend.

At a resistance level, the tide turns. The large amount of sell orders can fill all of the buy orders. Traders and investors can purchase as many shares as they wish without worrying about pushing the price higher.

Sometimes, stocks reverse at a resistance level and trend lower.

This happens due to anxious sellers. They know that the buyers will go to whoever will sell them shares at the lowest price. As a result, they reduce the price they are willing to sell at. Other anxious sellers see this and do the same thing.

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This can result in a snowball effect that forces the price lower.

But sometimes the buyers eventually overpower the sellers. The resistance breaks, and the shares head higher.

A breakout tends to be a bullish dynamic. It means that the people who created the resistance with their sell orders have either finished or canceled their orders. With this large amount of supply taken off the market buyers may have to force the price higher to draw sellers back in.

This can create an uptrend.

As you can see on the chart, there is resistance for AES around the $12.35 level. Support levels often convert into resistance levels and that's the case here.

Some traders would consider a market-neutral strategy. They would buy both a call and a put option.

If the stock moves higher, they would make money on the call and lose on the put. If it moves lower, the opposite is true. But they are confident that their profit will be larger than the loss.

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