While some analysts believe the market operates on a chaotic, unpredictable ‘random walk,’ successful traders know better. They have a keen eye for identifying significant price levels, understanding that when a stock reaches one of these levels, a trend reversal is highly likely. This is how they ‘time the market’ and achieve profitable trades.
Southern Company (SO) provides a perfect illustration of this concept. The $88.50 level has held immense importance for the company since early August, initially acting as resistance and later evolving into a support level. This shift is not unusual in the stock market; price levels that once resisted further upward movement can transform into support levels, providing a foundation for future growth. The reason behind this phenomenon lies in the fascinating world of market psychology.
When a stock dips below a resistance level, some traders sell their shares, believing it’s a wise move. But when the stock unexpectedly breaks through resistance and begins to rise, some of those sellers experience a pang of regret, realizing they may have sold too soon. Many of these remorseful sellers decide to buy their shares back if they can acquire them at the same price they initially sold them for. This influx of buy orders, triggered by these sellers’ regret, can convert the former resistance level into a support level.
The $88.50 level in Southern Company’s chart exemplifies this perfectly. As the stock reversed course and returned to the previous resistance level, a surge of buy orders emerged, effectively transforming it into a support level. This pattern demonstrates that successful traders understand the market’s non-random nature. Investor and trader psychology drive market movements, imbuing certain price levels with greater significance than others. When a stock reaches one of these levels, experienced traders recognize the potential for a trend reversal and seize the opportunity for low-risk, potentially rewarding trades.
