Deckers Outdoor Corporation (NYSE:DECK) is trading sideways on Tuesday. The stock opened higher on Friday after beating earning's estimates. But a selloff followed.
Deckers is our Stock of the Day. It seems to have found support. A reversal and rebound may be about to take place.
Successful traders recognize that certain price levels hold more significance than others in the stock market. These are referred to as support and resistance levels.
The interplay of supply and demand drives markets.
If there is more supply, or shares for sale, than there is demand, or shares to buy, sellers will need to undercut each other's prices to attract buyers. This will force the price lower.
At support levels, there Is enough demand to absorb all the supply. The selloff will end or pause.
If there is more demand for shares to be bought than there is supply of shares to be sold, buyers will need to outbid each other to attract sellers. This will push the price higher.
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At resistance levels, there is enough supply to fill all of the demand, so rallies tend to end or pause when they reach them.
Successful traders also know that resistance levels can turn into support levels, and support levels can turn into resistance levels.
As you can see on the chart below, in May, $123.50 was a support level. But it became a resistance level a few days ago.
Many of the people who bought the stock then regretted doing so because the price dropped soon after. They decided to sell if they could eventually get out at breakeven, so when they saw the stock rally and could do so they sold.
This selling by remorseful buyers created resistance.
Now the opposite has occurred. Seller's remorse has created support.
Many people who sold Deckers for around $112 in June later regretted doing so when the price rose higher. They told themselves that they would repurchase their shares at the same price they were sold for if they could.
So, now that the stock has fallen back to their selling prices, they are buying. It has created support.
Stocks tend to reverse after they reach important levels. Deckers may be about to be another example of this.
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