When it comes to the financial markets, some price levels are more important than others.
Knowing which ones are important is like having a map. When stocks reach these important levels, tradable moves tend to follow. That's why Salesforce, Inc. (NYSE:CRM) is our Stock of the Day.
These are called support and resistance levels.
At support levels, there is more demand than supply. When markets are going down, they tend to pause at support or even rally off if. At resistance levels, there is more supply than demand. When markets are moving higher, they tend to pause when they reach resistance or even reverse.
Resistance levels can turn into support; and support levels can turn into resistance. As you can see on the chart below, this has been the case with Salesforce's $267 level:
Levels that were resistance can convert into support because of seller's remorse. Some of the people who sold Salesforce while it was at resistance decided they made a mistake when the price moved higher. Many vow to buy their shares back, but they will only do so if they can get them at the same price they were sold for.
As a result, when the price reverses and eventually falls back to what had been resistance, they place buy orders. If there are enough of these orders it will create support at the level that had been resistance.
Levels that were support can turn into resistance because of buyer's remorse. Some people regret buying when the price drops below what they paid for their shares. Many of these remorseful buyers decide to exit their positions. But they will only do so if they can without losing money.
As a result, when the stock eventually reverses and moves back up to its buy price, they place sell orders. If there are enough of these orders it will create resistance at the level that had been support.
In the stock market, some price levels are more important than others. This is clear on the chart of Salesforce. Traders who can identify these levels will have an edge over those who don't.
- After Trump, Biden And Yellen's Criticism, China Proposes Rules To Cut Down On Solar Panel Overcapacity
Image: Shutterstock