The phrase “sell at former peaks” is a familiar adage on Wall Street, and it resonates with the realities of stock market behavior. Stocks often encounter resistance when they attempt to climb back to previous high points. This resistance stems from the psychological dynamics of investors and traders.
Take CVS Health Corp (CVS) for example. After a robust rally, the stock hit a snag around the $63.30 mark, coinciding with its peak in July. Interestingly, this occurred despite analysts highlighting the potential benefits of insurers transitioning into integrated healthcare companies. This situation perfectly illustrates the concept behind “sell at former peaks.”
When a stock experiences a sharp climb, many investors who bought at the peak are often left with feelings of buyer’s remorse, especially if the price subsequently drops. These investors, reluctant to accept a loss, tend to place sell orders when the stock approaches their initial purchase price. This collective selling activity can create a significant resistance level at the former peak, as seen in the case of CVS.
The stock market also exhibits the opposite phenomenon, known as ‘seller’s remorse’. Consider this: Investors who sell a stock near its support level, or bottom, may experience regret when it rebounds shortly afterward. These remorseful sellers often try to regain their positions, placing buy orders when the stock returns to the previous support level. This collective buying action can create a strong support level at the former bottom.
Successful traders understand the powerful influence of investor psychology on stock movements. They recognize that buyers’ remorse can hinder a stock’s climb at previous resistance levels, while seller’s remorse can create support at previous bottom points. This knowledge empowers traders to make informed decisions about where to place their buy and sell orders, ultimately optimizing their trading strategies.
