Science of Stock Price Action:
A stock starts underperforming and then keeps selling off from a level 2-3 times and then as it keeps repeating the same thing again and again – that resistance becomes powerful.
In markets, traders have sharp memory. Once they find – that a particular level is becoming a problem – they tend to back off from that level till there is sufficient reason not to do so. That’s how resistances develop and become significant barrier.
Just see how Bharti stock has created this resistance over last 8 years:
Source: Chartalert.com
Let’s take one recent example: ICICI Bank started underperforming in 2015 and now the stock seems to be creating a new resistance level for itself at 290.
Source: Chartalert.com
Now, ICICI Bank will continue to struggle as long as it trades below 290.
Axis Bank delivered a nice rally this year but see how one was better off booking profit at previous high. That level now is the resistance for Axis Bank stock.
Source: Chartalert.com
Ask any Value investor and he will tell you two things:
- Buy Low and Sell High
- Wait Patiently
But the question: How long? It has been now more than 8 years and Reliance stock still has not broken the resistance level of 1140-1150.
Source: Chartalert.com
Once the Resistance sustains for years, then it becomes hard to break: Bhaiya ye deewar toottee kyu nahin
Reliance has not crossed resistance of 1150 since June 2008 pic.twitter.com/njsbmvfdTR
— Deepak Singh (@smarket) December 13, 2016
For investors who follow charts – Reliance stock is Avoid as long as it trades below 1140-1150. But one should keep a close eye because the day Reliance crosses 1140-1150 – it will surge like crazy and deliver amazing gains in no time. That’s how the market works. They don’t make a move for long long time and then they make a huge move in no time. It’s important to wait for stocks to break the resistance.
Disclaimer – The state of the market notes is Deepak’s perspective on the market. The column is purely for educational purpose. Nothing contained herein is a solicitation to trade or a recommendation of a specific trade. By reading this publication you agree to make no trade relying in whole or in part on the comments of the writers