Apple Inc. AAPL shares have run into resistance at a price level that was previously a peak. The odds of it staying at this level for an extended period are small. There is a good chance they either break out and move higher, or reverse and head lower.
This is why our team of trading experts has made it our Stock of the Day.
Markets are driven by supply and demand, and emotions. It’s investor or trader psychology that causes the price action to appear as a pattern on a chart.
For example, when a stock rallies to a price level that had previously been a peak or resistance, there is a tendency for it to hit resistance once again. As you can see on the chart, this is the case with shares of Apple. The $236.50 level was resistance in July and now it has become resistance again.
This isn't a random coincidence. It happens because there are traders and investors who bought shares while they were forming this top in July. After the price headed lower soon after, many of them came to believe their decision to buy was a mistake.
A number of these remorseful buyers vow to exit their positions. But they didn't want to lose any money so decided that if the shares eventually rallied back to their buying price, they would sell. This way they can get out at breakeven.
So now that Apple returned to around $236.50, they are placing sell orders. This large concentration of sell orders has created resistance at the same price that had been resistance before.
If Apple can break through this resistance, it will be a sign that the people who created the resistance with their sell orders are out of the market. They have finished or canceled their orders. This means buyers will be forced to pay successively higher prices to acquire shares and this will push the market into an uptrend.
But if the stock can't break the resistance, there is a good chance it trends lower.
Some investors and traders who want to sell may start undercutting each other. They know the buyers will go to whoever is willing to sell at the lowest price and they are concerned they will miss the trade. Other concerned sellers see this and do the same thing. It could cause a snowball effect that pushes the price lower.
When a stock reaches an important price, as Apple has, the odds are small that it will stay at it for a long time. The odds are much greater that it will soon break out and head higher, or reverse and head lower.
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