Shares of Super Micro Computer, Inc. (NASDAQ:SMCI) are moving higher Friday. They have soared more than 60% since the beginning of the month.
But the rally may end or pause close to the $40 level. As you can see on the chart, the shares are both overbought and at resistance. These are bearish dynamics, and it’s why Super Micro is the Stock of the Day.
There is a reason why there is resistance around this price. It isn’t a coincidence. This is a price that the shares gapped down from in June.
People who bought back then experienced high levels of buyer’s remorse. The shares didn’t just trend lower after. The next day, they closed down more than 30%.
Some of them have been watching it and regretting it ever since. Now that they have the chance to sell their losing positions at breakeven, they are placing sell orders.
The large number of these orders has created resistance at the level.
In addition to being at resistance, the shares are overbought. This means they are trading above their normal or typical trading range.
This will draw sellers into the market.
Many trading strategies are based on reversion to the mean. These sellers will be anticipating a reversion or move lower. Their selling could put pressure on the shares.
The red line in the chart is two standard deviations above the 20-day moving average. This is a common indicator used by traders to determine if the shares are overbought.
95% of trading should occur within two standard deviations of the mean. When this threshold is exceeded, it shows overbought conditions.
As you can see, that is the case now.
The combination of being overbought while simultaneously at resistance can be bearish dynamics. There is a good chance Super Micro pauses or even reverses.
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