"Sell at former peaks" is an old Wall Street expression. People say this because stocks tend to run into resistance when they rally to a price level that has been a peak. This is due to investor and trader psychology.
After a large and rapid move higher, shares of CVS Health Corp (NYSE:CVS) have stalled around the $63.30 level.
As you can see on the chart, this was where the stock peaked in July. This is despite the fact that many analysts commented on the benefits of insurers evolving into integrated healthcare companies. This is why it is our Stock of the Day.
Rallies can stall at former peaks because there are people who regret buying at the peak when the price dropped afterward. Many of them experience buyer remorse and decide to sell their positions. But they don't want to lose money.
As a result, when the stock eventually reverses and returns to the buy price, they place sell orders. If there are enough of these orders it creates resistance at the level of the former peak, like it has here.
The chart also illustrates another important principle of trading. Stocks tend to find support when they sell off and drop to price levels that had been bottoms.
Read Also: Here's Why Surgery Partners Could Be the Next Hot Takeover
This happens due to sellers' remorse. There are traders and investors who sell when a stock is at support. Some of them regret doing so when it rallies soon after.
Some of these remorseful sellers decide to buy their shares back. But they will only do so if they can buy them at the same price they were sold at.
So, if the shares eventually reverse and get back to the support level they place buy orders. If there are enough of these buy orders it will create support at the price level that had been support before.
Successful traders understand investment psychology. They know that buyers' remorse can cause stocks to stall at price levels that had been resistance. They also know that seller's remorse can cause stocks to find bottoms at price levels that had been support.
This knowledge can give traders valuable insights into where to place their sell and buy orders.
Photo: Shutterstock
