Some analysts think the market can't be timed. They think that it follows a “random walk.” These analysts are wrong.
Successful traders can identify important price levels. They know when a stock reaches one of them, there is a good chance the trend reverses. That's how they time the market and profit. An example of this can be seen on the chart of Southern Co (NYSE:SO). This is why it is our Stock of the Day.
The $88.50 level has been important for Southern Company since early August. It was resistance then and now it's a support level.
In the stock market, price levels that were once resistance can turn into support levels. It is a common occurrence. There is a reason for this. It isn't “random,” it is because of market psychology.
There are traders and investors who thought selling their shares was a good idea when the price traded lower. But some of them thought they made a mistake when the stock broke the resistance and moved higher.
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Many of these remorseful sellers decide to buy their shares back, if they could get them for the same price they sold them at. As a result, when Southern Company reversed and got back to the level that had been resistance, they placed buy orders.
If there are enough of these buy orders, the level that was resistance can convert into a support level. As you can see on the chart, this was the case with the $88.50 level for Southern Company.
Successful traders know that markets are not random. Market moves are the result of investor and trader psychology. This psychology results in some price levels having more importance than others.
When a stock reaches one of them, savvy traders know there's a good chance the trend reverses. They also know there will be chances for low-risk trading opportunities.
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Photo: Joshua Choate from Pixabay
