Trading in Autodesk, Inc. (NASDAQ:ADSK) is quiet on Tuesday. This comes after Friday's rise by more than 9%. The rally started when the company released earnings that exceeded analyst expectations.
We have made Autodesk our Stock of the Day. The chart illustrates an essential principle of financial markets that traders can use to profit.
Some market analysts are proponents of the random walk theory. They believe that markets are random and that it is impossible to outsmart the market and predict where it will go.
These analysts are wrong, and the chart of Autodesk proves it.
On November 24, the stock reached a high of $326.62 that day. On Friday, the high trade was at $326.45.
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Finding resistance 17 cents away from a previous high on a $326 security is not random. Stocks frequently hit resistance and turn at prices that had previously been a peak or top. It is a predictable and common occurrence in the markets.
It happened because of investor and trader psychology. It is due to remorseful buyers.
These are people who purchased shares at the peak and later came to regret their decision when the price dropped immediately after. Some of these traders and investors chose to hold onto their losing positions, but they also decided that if they could eventually sell at breakeven, they would.
As a result, when the shares reached this former peak, they placed sell orders. The large number of these orders led to resistance forming at the same price that had previously been resistance.
There is a chance that Autodesk begins to trend lower.
Stocks frequently sell off after hitting resistance. This is because of anxious sellers. They are worried someone else will be willing to sell their shares at a lower price.
They know that this is who the buyers will go to, so they reduce the prices they are willing to sell at. Other anxious sellers see this and do the same. This can result in a snowball effect that forces the shares into a downtrend.
Markets are not random. Successful traders can identify essential price levels and use this knowledge to profit.
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