Finding the floor and ceiling of a stock involves learning technical analysis of stock charts. Once you learn the basics of support and resistance, it is possible to guess whether the stock is trading at its floor or ceiling. Technical analysis attempts to identify at what point the investing public will come in to buy or sell a stock based on charts showing stock prices and volume at specific price points over time. Use a chart that displays daily trading over a year period.
Imagine buying a stock at $40 a share. Immediately after your transaction, the stock starts to decline in price because there are more shares for sale than the buyers are buying. Each day it declines you get more nervous about your mounting loss. Finally, the stock price hits $30 a share and starts to rise because some buyers decided the stock is inexpensive at that price. The stock rises as more buyers are drawn into the market. When it hits your buy-in price of $40, you are so glad to be able to get out without a loss that you immediately sell. Other stockholders sell at that price, too, because it again starts to decline. When it reaches $30, you know from experience that it is likely to attract enough buying interest to run the price back up to $40 again, so you buy in. It does, indeed, rise and as the price approaches $40 a share you get ready to sell, hoping to buy back in at $30 again. This is the emotional action and reaction of investors that technical analysis tracks and analyzes.
The resistance point, or ceiling, is a recent high price that was followed by a sell-off. A stock may bounce off the ceiling for several days before declining in price. The longer the stock stays around the ceiling price without trading higher, the stronger the resistance to further price appreciation. The more often a stock trades at a price slightly higher than resistance the more likely there is buying interest growing, based on investors' perception of a coming announcement of good earnings or other bullish news about the company. As a stock trades sideways, a sign that it is losing buy interest can be seen in lower daily volume. However, if daily volume begins to rise as the stock price rises slightly above resistance, it is a signal that the price might go higher. Once resistance is broken, that resistance level becomes the new support or floor for that stock.
If a stock price reaches resistance and trades down on higher volume, it is likely that it will decline to test the support or floor. Support is the dollar price where there is more demand for the stock than there is supply of stock that nervous investors are trying to sell. When there are more buyers than sellers, the stock price rises. Support gets stronger as more traders recognize the stock is in a trading range between its floor and ceiling. They buy in at support and sell out at resistance until other indicators, such as volume, show that demand for the stock at support is dwindling due to declining volume. If it trades back up to test resistance, on higher volume, it might have enough buy momentum to trade up through resistance into a new trading range.
Identifying Floors and Ceilings
Using a clear ruler or the interactive chart tool of your online stock chart provider, place a horizontal line intersecting the most recent low price on the chart. If it intersects other lows at that price, selling interest may be abating and the next rise in price might break through resistance. If there are few other instances where the most recent low attracted buying interest, it can mean one of two things: either support is still weak and the stock price will decline to the next most recent low or the stock has recently entered a new trading range and might bounce up off the floor a couple more times before trading up through its ceiling.
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