Resistance levels are a large concentration of traders and investors who are looking to sell their shares at, or close to, the same price. The "level" is typically more of a range than a particular price.
Sometimes these levels and ranges are clear and well-defined.
As you can see on the following chart, that is the case with the $119.75 level for Exxon Mobil Corp (NYSE:XOM). This is why it's the Stock of the Day.
Markets are driven by supply and demand. If there is more demand (buy orders) than supply (sell orders), the shares will move higher as the traders outbid each other to attract sellers.
At resistance levels, there is enough supply to satisfy all of the demand. This is why rallies tend to end or pause when they reach them.
Sometimes when a stock reaches a resistance level it reverses and heads lower. That has been the case with ExxonMobil and the $119.75 level since May. Each time the shares reached it a sell-off followed.
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This happens when some traders and investors who created the resistance with their sell orders become nervous. They know that the buyers will go to the seller willing to sell their shares at the lowest price.
As a result, they reduce the prices they are willing to sell their shares for. Other nervous traders and investors see this and do the same. It starts a snowball effect of sellers undercutting each other.
This results in the shares moving in a downtrend.
Resistance levels can stay intact for a long time. This means that if ExxonMobil reaches this resistance again, there's a good chance another sell-off follows.
Resistance can stay intact because of buyer's remorse. There are investors and traders who bought the stock while it was at resistance who think they made a mistake when the price heads lower.
They decide that they want to sell their stock. So, if the shares eventually rally back to the resistance, these remorseful buyers place sell orders. If there are enough of these order, it will create resistance at the same level that had previously been resistance.
Photo: Del Henderson Jr. via Shutterstock