Some old Wall Street sayings may not hold up, but others do because they tap into trader psychology. One such saying is, 'Sell at former peaks.'
This concept is particularly relevant to Intuit Inc. (NASDAQ:INTU), which is why our team of trading experts has made it our "Stock of the Day."
Stocks tend to hit resistance when they rally up to price levels that were resistance in the past. There is a logical reason for this.
There are traders and investors who bought shares at the previous peak. But soon after they did, the price moved lower.
When this happens, some of the people who bought regret their decision to do so. Many of them decide to sell their positions. But they don't want to lose any money.
As a result of this, when the price returns to their purchase price, they place sell orders. If there are enough of these remorseful buyers placing sell orders, it will create resistance at the price level again.
You can see on the chart that every time over the past few months that INTU reached levels around $672 it hit resistance, and each time a selloff followed.
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Stocks have a tendency to sell off after they hit resistance. This action is also due to psychology.
Some of the people who want to sell their shares start to become concerned. They can sense that there are other sellers coming into the market. They know this is the reason the stock has stopped moving higher.
They worry they won't be able to execute their trades if others start selling at lower prices, as buyers will naturally opt for the cheaper offers.
As a result, they reduce the prices at which they are willing to sell. Other concerned sellers see this and do the same thing.
This action can turn into a snowball effect. This could push the shares into a downward trend.
People who understand technical analysis understand that charts are graphical illustrations of human emotions and psychology.
There is resistance at former peaks because of buyer's remorse. Stocks sell off of resistance because of anxious sellers.
"Sell at former peaks" is one Wall Street saying that's true, and the chart of Intuit proves it.
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