Shares of PepsiCo, Inc. (NASDAQ:PEP) traded lower Friday after Thursday's gain of almost 7.5%. The move higher was driven by an earnings surprise. Second-quarter earnings came in at $2.12, which was above the estimated $2.02.
But PepsiCo is overbought and at a resistance level. This means there is a chance it heads lower. This is why it's our Stock of the Day.
Successful traders can identify important price levels. As you can see on the chart, $144.50 has been a significant level for this stock.
Back in March, it was a support level. Then, in April, it became a resistance level. In the financial markets, support converting into resistance is a common occurrence.
It is the result of investor and trader psychology.
Some of the people who bought Pepsi while it was at support decided their decision to do so was a mistake when the support broke and the shares dropped below it. A number of them decided to sell their stock if they could do so at breakeven.
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So when it rallied back to around $144.50, they placed sell orders. The large number of these orders caused resistance to form at the same price that had been support.
Pepsi has once again run into resistance around this level. Buyer's remorse can turn what had been support into resistance. It can also keep resistance intact.
Some of the people who purchased shares in April regretted doing so when the price dropped. Some of them decided to sell if they could eventually get out without incurring a loss. Now that the stock has rallied back to the former resistance, remorseful buyers are placing sell orders.
The large number of these orders has created resistance at the level again.
Pepsi is also overbought. The red line on the price chart is two standard deviations above the 20-day moving average. If the stock is above this, it is considered to be overbought. As you can see, that's the case now.
This will draw sellers into the market. They will be expecting a reversion to the mean or a move down. Their selling could force the stock lower.
Stocks that are overbought and at resistance tend to reverse and enter downtrends. It may be about to happen with PepsiCo.
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