Shares of Apple Inc. (NASDAQ:AAPL) are trading higher on Tuesday. The iPhone maker’s stock price gained almost 15% in just one week. But the rally may end or at least pause around current levels. The shares are overbought and at resistance. These can be bearish dynamics. This is why Apple is the Stock of the Day.
Many trading algorithms are based on statistics and probability theory.
The red line on the chart below is two standard deviations above the 20-day moving average.
Standard Deviations: A Statistical Concept.
According to statistics and probability theory, 95% of trading should occur within two standard deviations of the mean. If a stock exceeds this threshold, as Apple currently does, it is considered to be overbought.
There will be traders and investors who are anticipating a reversion to the mean or move lower. They will enter the market as sellers, and their selling could result in putting downward pressure on the shares.
In addition to being overbought, Apple is trading at a resistance level. There tends to be resistance at former peaks or resistance levels, and that could be the case here.
There are people who bought shares around $315 in late May and early June who came to think their decisions to do so were a mistake after the price dropped. Many decided to hold onto their losing positions.
But they also decided to sell them at the same price they bought them for if they could ever do so. Now that the shares have returned to this price, these remorseful buyers are placing sell orders.
The large quantity of these orders has created resistance at the price. There is a good chance the rally ends or pauses here.
Many newer traders think that news moves the market. This is sometimes true, but most of the time, when a stock makes a meaningful move, it is the result of technical factors.
Overbought stocks that reach resistance tend to stall out or even reverse. The trend indicates that Apple shares may head lower.
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