Snap Inc. (NYSE:SNAP) shares are moving higher on Tuesday. They are approaching a potential resistance level. They could be on the verge of a breakout. Rallies tend to end or pause when they reach resistance levels, but sometimes they break through them. This is why Snap is the Stock of The Day.
Understanding investor and trading psychology is an important aspect of trading.
As you can see on the chart below, in early March, Snap hit resistance around $5.35. A selloff followed.
When this happened, the people who sold at the resistance thought their decision to sell was a good one. But when this resistance broke in April, many of them changed their minds.
They came to think that their decision to sell was actually a mistake.
A number of them decided to buy their shares back if they could eventually repurchase them at the same price they were sold for. As a result, when Snap dropped back to around $5.35, they placed buy orders.
These orders created support at the price that had been resistance.
When a rally followed, people who purchased shares were happy they did. They were making money.
But when this support broke in June, a number of the previously happy buyers decided that their decision to buy was actually a mistake. Now they are underwater.
Many of these remorseful buyers decided to hold onto their losing positions. But they also decided that they would sell if they could eventually do so at breakeven.
This means that if Snap rallies back to $5.35, they will place sell orders. If there is a large number of these orders, it will create resistance at the level that had been support.
But if Snap breaks this resistance, it will show that the sellers who created it have left the market. This will force buyers to be aggressive if they want to acquire shares. This could form a new uptrend.
Successful traders know how to identify important support and resistance levels. They also understand the psychology that creates these levels. This creates opportunities to profit.
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