Why Overhead Supply Is A Threat To A Stock

Resistance makes stock prices go down and builds tension. Support buoys a stock up, often setting the stage for a release to new highs.

Support occurs as buyers step in at prescribed levels to maintain or boost a stock’s price.

A stock hits resistance at levels where certain shareholders have decided to sell. An institution could be hitting its projected price target. Or the stock may be 20 – 25% above its most recent buy point, triggering some investors to take profits.

Moving averages such as the 50-DMA, 200-DMA act as both support and resistance. If a stock is currently trading above its 50-DMA/200-DMA, then these moving averages may act as support to the stock’s price. On the contrary, if the stock is trading below its 50-DMA/200-DMA, then they might act as resistance to the stock’s price.

Other forms of resistance, prior highs, and over head supply can also act as resistance.

Over head supply occurs when a stock price is below their highs. Investors who bought the stock at prior highs are at losses in the stock. As soon as the stock tries to gain momentum, these loss-making investors sell off their shares to break-even from their buy price. Thus, there will be selling pressure from these investors, which in turn will act as resistance to the stock’s price.

This is the daily chart of Mindtree (from August 2015 to August 2016). At (1), the stock reached its highest point; later, on three occasions where the stock was trying to go up (2), it found resistance and went down as it couldn’t pierce its resistance.

The upside: the threat of overhead supply diminishes with time; after about 18 months, the risk from overhead supply can be taken off.

Some of the fundamentally strong companies exhibiting strong technical characters can pierce resistance from good breakouts and go on to make good runs. But, most of the stocks will stall when the selling resistance sets in.

Related links: https://www.investors.com/how-to-invest/investors-corner/why-overhead-supply-threat-in-a-stocks-new-base-expires-over-time/

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