Nike’s stock (NKE) is on the rise following the appointment of Elliott Hill as CEO, who is tasked with rejuvenating sales by mending ties with retailers. However, a closer look at the chart reveals a significant hurdle: resistance around the $88.50 mark. This isn’t surprising. Our team of trading experts has identified this as our Stock of the Day because this resistance stems from a familiar trend in financial markets.
Price levels that previously acted as support can transform into resistance. This is a common occurrence, not just in the stock market, but across all financial markets. This pattern arises from the psychology of investors and traders.
The transformation of support into resistance can be attributed to regretful buyers. Take, for example, traders who bought Nike stock at its support level in April. They initially felt confident about their decision when the stock price rose shortly after. But in June, the support level was breached, causing a sharp decline in the stock price.
Some of those who bought at the support level felt regret as they were now facing losses. To try and recoup their losses, many of these buyers placed sell orders when the stock price reached their initial buy price. Their aim was to exit their positions at breakeven. The high volume of these sell orders created resistance at the price level.
This dynamic can be observed at other price levels as well. For instance, the $97.50 level acted as support in March but transformed into resistance in late June.
Stocks sometimes experience a reversal and sell-off after reaching a resistance level. This happens when some traders and investors, who contributed to the resistance with their sell orders, become anxious. They fear that other sellers will lower their asking prices, potentially leading to a downward spiral. To avoid being left behind, these anxious sellers lower their offering prices, triggering a chain reaction that drives the price down.
Successful traders understand the psychology behind these chart patterns. This understanding allows them to capitalize on these market dynamics and generate profits.
