To see why stock price history tells successful traders when securities are oversold or overbought, we must first define the meanings of “oversold” and “overbought”. An oversold condition can be defined as the price where sellers will be replaced by more buyers who are hunting for bargains or looking for profit opportunities by buying securities when their prices bottom out. Overbought conditions occur at the price where buyers are replaced by sellers for a position in that stock. This is similar in theory to the economics concept of “supply and demand”.
When analyzing chart pattern reversals to better estimate price resistance and price support levels to help you exploit profit opportunities and to handle your trading decisions using stock price history, any stock chart profile can be reviewed. If you are buying and trading options, stripping dividends, writing covered calls, or even writing LEAPs, you can apply this regularly used information to your advantage.
So exactly what happens in the real world and how do the outcomes of stock price history translate to stock chart patterns as they relate to price points or plots?
A price level on a stock chart profile where we can expect an increase in the demand for a security, where the buyers take over as the weak sellers fold, is indicated by support (bottom price support). How do we know this? We know this by identifying the previously documented reaction to a price level in the chart’s stock price history. While learning how to read stock charts, we see that for any stock there are certain price levels where the selling pressure slows down or subsides, and the price trend shifts and reverses as stock price increases. We can assume, when this happens, that this price level will retain its significance when the price approaches that level again in the future.
It is important to note that all recorded plots at the end of the day represent the capital buying and selling net results of investors or institutions. Thus, it is very clear and factual. A bottoming price is known as the price support level, because the stock begins its recovery and the security’s price is supported at this level. Conversely, the overhead price resistance is the level where the security price has shown an inability to rise anymore, and a reversal to the downside can be expected. The best technical analysis tool to review for that price level is the RSI technical indicator.
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