Shares of Palantir Technologies Inc. (NYSE:PLTR) are trading lower on Thursday after announcing a new contract with Starlab Space.
The rally that began in late May might be reversing course. Palantir stock, currently showing signs of being overbought at resistance levels, could be headed for a downturn.
This makes PLTR our Stock of the Day, as stocks in this position often reverse and sell off.
Overbought means that a stock is trading above what would be its typical or average trading range. It is the result of aggressive and emotional buying. There are many ways to identify overbought conditions.
One of the most popular is Bollinger Bands. The red line on the chart above is a Bollinger Band. It is two standard deviations above the 20-day moving average. This is an important threshold, and PLTR has exceeded it, so it would be considered to be overbought.
Many trading programs and strategies are driven by statistics and probability theory, and suggest that 95% of all trading should be within two standard deviations of the mean.
Being above this threshold will draw sellers into the market. They will be anticipating a reversal, and their selling may actually push the market lower.
As you can see on the chart, the shares also traded above the Bollinger Band in early March and early May. A large move lower followed each time.
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Resistance is a price level where significant selling interest emerges, causing stocks to either reverse or stall. This occurs because the supply of the stock outweighs the demand at that price point.
As illustrated in the chart, the $27 mark acted as resistance for PLTR in March. With its recent upward trajectory, the stock is once again approaching this critical level.
Markets often sell off at resistance levels because traders and investors, recognizing increased selling activity, become anxious. This apprehension arises as they anticipate more sellers entering the market, reinforcing the resistance.
Some traders become concerned about missing out if others start selling at lower prices, knowing that buyers will gravitate toward these offers. Consequently, they lower their asking prices to attract buyers.
Other anxious sellers see this activity and do the same. It results in a snowball effect as they undercut each other. This pushes the price lower.
So, being overbought while simultaneously reaching a resistance level tends to trigger a price reversal. Palantir may be on the verge of such a turnaround.
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