Shares of Constellation Energy Corporation (CEG) are trading lower Monday. This comes after Friday's sell off of more than 8%. There is a good chance the move lower continues.
As you can see on the chart, the stock found support around the $280 level and rallied. Stocks rallying after they reach support is a common occurrence in the stock market. But now, this support appears to have broken. This is why Constellation Energy is our Stock of the Day.
Support is a price level where there is a large amount of buy interest.
If a stock is trending lower, it is because there are more shares for sale than there are to be bought. This forces traders and investors who wish to sell to offer their shares out at a discount, forcing the stock into a downtrend.
When a stock reaches a support level, the dynamic changes. As many, if not more, shares must be bought than sold. This is why selloffs pause or end when they reach support.
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Sometimes, stocks rally after reaching a support level like Constellation did when it last dropped to $280. This occurs due to anxious buyers.
Some of these buyers become concerned that others will be willing to pay higher prices than they are. They know that this is who the sellers will go to.
They don't want to miss out, so they increase the prices they are willing to pay. Other concerned buyers see this and do the same thing. This can result in a snowball effect or bidding war that pushes the price higher.
But sometimes, support breaks, and the shares trade below it. This bearish dynamic shows that the buyers who created the support have left the market.
Sellers may once again be forced to lower the price if they want their orders executed, which means Constellation may trend lower.
The reason why there was support at $280 is because it had previously been a resistance level.
Levels that were resistance can turn into support. This is also a common occurrence in the market. It happens because there are people who sold at the resistance who came to regret doing so when the resistance broke and the price moved higher.
A number of these remorseful sellers decide that if they can buy their shares back at the same price they were sold for, they will. As a result, if the stock falls back to the resistance level they place buy orders. If there are enough of these orders, it will form support at the price that had been resistance.
But now that the support is broken, another move down may follow.
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