Overhead Resistance Determines A Stock’s Performance

by Olivier on June 29, 2009

We have another winner: BXI.V – Bio Extraction. I have stated numerous times I am extremely bullish for that stock and I even went so far as to say this was the best looking chart on my entire public list. There is a reason why I did that. So tonight I’ll write a bit about the underlying technical analysis concept that is responsible for BXI.V’s performance.

bxi

There are a few reasons why I bought into the stock which are not related to technical analysis. But in the end my buy and sell decisions are based on what the charts and the technicals tell me to do.

This brings us to the concept of Overhead Resistance.
A famous stock market adage goes like this:

If a stock is trading near its all time high or its all time low there is a reason for it.

Think about it for a minute. Try to visualize what kind of traders are in each stock. Successful and winning traders go for strength and avoid weakness. You want to put your money at work with the winners. It’s as simple as that.

Humans are obsessed by their entry prices. The majority simply can’t accept losses, turn the page and move on. So from a psychological standpoint a stock with overhead resistance is a huge negative. Once traders are down with their position they want to get out even. The bigger the loss the less rational their decisions. There is the urge to recoup losses or to minimize them at all cost. So when a stock with overhead resistance goes up it has to fight through this supply. Every time the stock reaches a higher price level this represents a huge barrier where new sellers appear whose only goal is to get out even. This selling pressure is a performance killer.

If you look at a stock’s price action which is trading near its all time high you don’t have this kind of selling pressure. Nobody is down with their position. Most often shareholders of strong stocks are winning traders or people who are in the know. Odds are high more good things are to come so they build positions accordingly. They know these are high potential stocks and want exposure to great opportunities.

So next time a stock trading near its all time high powers higher and another stock in the same sector with huge overhead resistance can’t develop traction think about what kind of traders are backing each stock.

Strong stocks most often have no overhead resistance.

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Charts:  http://stockcharts.com/public/1109839/tenpp

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