International Business Machines Corporation (NYSE:IBM) shares are lower Tuesday. But they remain in a longer-term uptrend. They could also be on the verge of a breakout. This is why we have made IBM the Stock of the Day.
If a stock or market is trending higher, there isn’t enough supply or sell orders to fill all of the demand or buy orders. This forces investors and traders who wish to buy to outbid one another, which can put the shares into an uptrend.
This changes when the shares reach a resistance level. There are enough sell orders to cover all buy orders. This is why rallies end when they reach resistance levels.
As you can see on the chart, there is resistance for IBM around $239.
Sometimes Stocks Sell Off After Reaching Resistance
This happens when some of the people who created the resistance become anxious and impatient.
They worry that other sellers will undercut them. As a result, they reduce their offer prices. Other anxious sellers see this and do the same. It could result in a snowball effect that forces the prices lower.
But sometimes, at resistance, buyers eventually overpower sellers and push the price higher. When this happens, traders say it is a ‘breakout’. This can be a bullish dynamic suggesting a continued upward move.
If the price is above the resistance, it shows that the sellers who created the resistance are gone. They have either finished or canceled their orders.
With the sellers out of the way, the buyers will have no choice but to be aggressive and force the price higher if they want to draw sellers back into the market. This could result in a new uptrend forming.
Successful traders understand the supply and demand dynamics that are illustrated on a chart. This is one of the reasons they profit.
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