General Motors Company (NYSE:GM) shares are trading lower on Tuesday. They may also be breaking support.
Stocks that break support tend to head lower and that could be the case here. This is why our team of technical analysts have made it our Stock of the Day.
Some analysts don't understand technical analysis. They try to identify patterns on charts without understanding the price action that causes them to form.
If understood and applied correctly, technical analysis is the study of supply and demand in a market.
If a stock is trending lower, there isn't enough demand, or buy orders, to absorb all of the supply, or sell orders. As a result, investors and traders who wish to sell are forced to offer their shares at a discount to draw buyers into the market.
This forces the shares into a downtrend.
When a stock drops to a support level, the situation changes. There is enough demand to absorb all of the supply. People can sell as many shares as they wish without worrying about pushing the price lower.
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As you can see on the chart, the $55 level has been well-defined support for General Motors since the beginning of November. But this support may be breaking.
If a stock trades below what had been support, traders say the support has been "broken." This isn't just symbolic. It illustrates an important market dynamic.
It shows that the investors and traders who created the support with their buy orders are gone. They have finished or canceled their orders. Either way, they have left the market.
With this large amount of demand or buy orders out of the way, the stage could be set for a new downtrend to form. In order to draw buyers back into the market, traders will once again be forced to offer their shares at a discount to get buyers interested.
This is why stocks tend to head lower after support levels are broken. A new downtrend may be forming in General Motors.
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