Trading in Axon Enterprise, Inc. (NASDAQ:AXON) was quiet on Thursday, following an 8.5% drop in the shares on Wednesday. The drop came after the stock broke support.
There is a good chance the move lower will continue. This is why we have made it our Stock of the Day.
Markets are driven by psychology. One result of this is the existence of what traders refer to as ‘psychological' levels.
An example of this can be seen on the chart of Axon.
In November 2024, the stock encountered resistance at the $700 level. From there, it reversed and headed lower.
There was resistance at $700 because it is a psychological level. People like nice round numbers, and they tend to place their orders at them.
From a fundamental analysis point of view, there is no way this can be explained. It doesn't have anything to do with PE ratios or PS ratios. It is purely psychological.
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After Axon sold off, some of the people who bought shares at around $700 regretted their decision to do so. A number of them decided that, if possible, they would eventually sell their shares at the same price they paid for them.
This way, they can exit the position at a breakeven point.
So when the stock returned to $700 in February, they placed sell orders. There was a large enough concentration of them to form resistance at the level again.
In May, this resistance was broken. When this happened, some of the people who had sold shares around $700 came to regret their decisions to do so. They vowed to buy their shares back, if they can eventually get them for the same price they were sold at.
When the stock dropped back to $700 in July, these remorseful sellers entered buy orders. The large number of these orders created support.
Now that support has been broken. This means the buyers who created the support have left the market.
With these buyers gone, sellers may need to offer their shares at a discount to attract them back. This could force Axon into a new downtrend.
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