The best traders don't play offense. They play defense. When they trade, they are reactionary. They let the market tell them what to do.
These traders know that the market has a "memory." This means that important support and resistance levels can stay intact for long periods of time. It could be weeks, months — or even years.
As you can see on the chart, this could be the case with the $225 level for Humana Inc. (NYSE:HUM). This is why our team of technical analysis experts has made it our Stock of the Day.
If a stock is trending lower, there isn't enough demand to absorb all of the supply. Sellers are forced to offer their shares out at a discount if they want to find someone to buy them. This action forces the shares into a downtrend.
Downtrends end when they reach support. At support levels, there is enough demand (buy orders) to absorb all of the supply (sell orders).
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The $225 level first became support for Humana in April 2019. Then it was support again in March 2020. This was a case of "market memory."
Support can stay intact for extended periods of time because of remorseful or regretful sellers. These are people who sold their shares while they were at support, but regretted doing so after the stock rallied and the price moved higher.
Some of these disappointed sellers vow to buy their shares back. But they will only do so if they can get them at the same price they were sold.
As a result, when the shares eventually return to the support level, they enter buy orders. If there are a large number of these buy orders, it will create support at the level that had been support before.
After some disappointing news, Humana is selling off and once again getting close to the important $225 level. If it does get there, there is a good chance that the market "remembers" this level was support before.
This means there is a good chance that it finds a bottom. It also means there is a good chance the stock reverses and rallies off of this level just like it did in April 2019 and March 2020.
Photo: T. Schneider via Shutterstock