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A challenge impacting investors is buying a stock that is breaking out to new highs. Emotions take control and beliefs set in about missing out on the upward moves. Buy orders increase at the highs, share prices top out and the stock declines.
Prices fall up to 25% or more, and anyone who is purchasing at the highs is looking at substantial losses. Negative emotions take control and investors sell, cut their losses and move on.
The stock moves past the old high and sets a new one. Situations like this happen when overhead supply exists. Here’s why.
Overhead Supply Defined
Overhead supply is when the price of the stock is sitting below the highest value. Investors bought shares at higher prices and are down in the stock. As the stock moves back up, these investors sell shares and limit the losses. These investors are looking for a move back to the peak just to sell.
An Example of Overhead
In February 2021, Moderna (NASDAQ: MRNA) ran to the all-time high of $180. Investors purchasing the stock at these levels rode the volatility, with prices dropping to $125 in April. MRNA ran back up for a retest of the overhead supply and selling increased to limit losses. As investors locked in the losses, the shares rebounded, the stock broke through $180 and moved higher.
What Lessons can Overhead Supply Teach you?
The laws of supply and demand dictate what happens with stock prices. Overhead supply develops when the stock runs up to new highs and investors become excited about the movements. A feeling of enthusiasm grows and investors buy the stock or stock index at the highs. The stock overextends and prices drop.
The average investor needs to understand how overhead supply impacts stock prices. An ample supply builds up under the highest price that is waiting to break even or sell.
As the supply builds, the prices drop and start to climb back up. A peak develops once all of these investors sell the shares they bought at the stock’s highs.
The massive supply causes shares to fall because of the enormous number of sell orders.
If prices trend upward, more investors might jump in and the cycle will begin again.
Best Online Stock Brokers
Benzinga rates some of the best brokerage firms for making your trades.
Webull, founded in 2017, is a mobile app-based brokerage that features commission-free stock and exchange-traded fund (ETF) trading. It’s regulated by the Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA).
Webull offers active traders technical indicators, economic calendars, ratings from research agencies, margin trading and short-selling. Webull’s trading platform is designed for intermediate and experienced traders, although beginning traders can also benefit.
Webull is widely considered one of the best Robinhood alternatives.
- Active traders
- Intermediate traders
- Advanced traders
- No account maintenance fees or software platform fees
- No charges to open and maintain an account
- Intuitive trading platform with technical and fundamental analysis tools
- Does not support trading in mutual funds, bonds or OTC stocks
E*TRADE is an online discount trading house that offers brokerage and banking services to individuals and businesses. One of the first brokers to embrace online trading, E*TRADE not only survived both the dot-com bubble and Recession — it thrived. You can choose from two different platforms (one basic, one advanced). E*TRADE is a suitable broker for traders of most skill levels, whether you want to buy mutual funds and hold them for decades or dabble in options swing trading. E*TRADE offers a library of research and education materials to help you out.
- Active traders
- Derivatives traders
- Retirement savers
- Sophisticated trading platforms
- Wide range of tradable assets
- Exceptional customer service
- Limited currency trading
- Higher margin rates than competitors
- No paper trading on its standard platform
Moomoo is a commission-free mobile trading app available on Apple, Google and Windows devices. A subsidiary of Futu Holdings Ltd., it’s backed by venture capital affiliates of Matrix, Sequoia, and Tencent (NASDAQ: FUTU). Securities offered by Futu Inc., regulated by the Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA).
Moomoo is another great alternative for Robinhood. This is an outstanding trading platform if you want to dive deep into smart trading. It offers impressive trading tools and opportunities for both new and advanced traders, including advanced charting, pre and post-market trading, international trading, research and analysis tools, and most popular of all, free Level 2 quotes.
Get started right away by downloading Moomoo to your phone, tablet or another mobile device.
- Cost-conscious traders
- Active and Advanced traders
- Over 8,000 different stocks that can be sold short
- Access trading and quotes in pre-market (4 a.m. to 9:30 a.m. ET) and post-market hours (4 p.m. to 8 p.m. ET)
- No minimum deposit to open an account.
- No chat support
This latest groundbreaking technology is IBKR GlobalAnalyst, a new trading tool that helps investors compare the rate of PEG or price-earnings growth valuations and provide more immediate and comprehensive financial metrics of stocks, globally.
Recognizing that stock selection can be challenging for investors to compare the valuations of domestic and international stocks, Interactive Brokers created GlobalAnalyst to offer investors a simple, yet powerful tool to easily evaluate investment opportunities around the world.
Using GlobalAnalyst, investors can search for stocks by region, country, industry, market capitalization and currency to uncover undervalued stocks worldwide. The resulting table displays the current market and financial metrics, including the PEG Ratio. The PEG Ratio is the PE ratio divided by the three-year compound earnings growth rate, and smaller PEG Ratios typically indicate undervalued companies.
- Price earnings growth valuations
- Easily evaluate investment opportunities
CenterPoint Securities is ideal for active traders who demand access to advanced tools and services. While investors and casual traders are likely to be content with the basic offerings of traditional online brokerages, active traders will benefit from CenterPoint’s suite of advanced trading tools. If you value execution quality, access to short inventory, advanced trading platforms, and accessible customer service, CenterPoint is an excellent choice.
- Intermediate to Advanced traders
- High-volume traders
- Momentum traders
- Short sellers
- Unrivaled access to short inventory
- Flexible order routing for improved executions
- Discounts for active traders
- Advanced platform with fast executions
- Reliable customer service
- Not designed for beginner or low-volume traders
TradeStation is for advanced traders who need a comprehensive platform. The brokerage offers an impressive range of investable assets as frequent and professional traders appreciate its wide range of analysis tools. TradeStation’s app is also equally effective, offering full platform capabilities.
- Advanced traders
- Options and futures traders
- Active stock traders
- Comprehensive trading platform and professional-grade tools
- Wide range of tradable securities
- Fully-operational mobile app
- Confusing pricing structure to leave new traders with a weak understanding of what they pay
- Cluttered layout to make navigating TradeStation’s platform more difficult than it should be
When to Avoid a Stock
Watching the overhead supply helps in deciding when to avoid the stock and improves the entry points. The key is not to buy shares at the highs and to monitor the stock after share prices drop. Nervous investors will sell to limit their losses, and the cycle can resume until these sellers become exhausted.
Frequently Asked Questions
How do you review stock charts?
You want to look at the support, resistance levels and trend lines. It’s also important to monitor when the company pays dividends, stock splits that are taking place and check the historic lows and highs.
What is supply stock?
Supply stock is the number of people who want to sell because the price of the stock is below the highest value.