Stock of the Day: Is McDonald's Reversing?

Trading in McDonald’s Corporation (NYSE:MCD) is quiet on Thursday. The shares dropped 2.6% yesterday after reversing off a resistance level. A new downtrend may be forming. This is why McDonald’s is the Stock of the Day.

Resistance is a price or level where there are large amounts of shares for sale. If a stock is in an uptrend, it’s because there aren’t enough sell orders to fill all of the buy orders.

Investors and traders who want to buy are forced to outbid each other and pay higher prices successively. This forces the shares into an uptrend.

When an uptrend reaches resistance, there are enough sell orders to fill all of the buy orders. Buyers can buy all they wish to without moving the price higher.

Sometimes Stocks Reverse, Head Lower After Resistance

This happens when some of the people who created the resistance with their sell orders become anxious and impatient. They know the buyers will go to whoever is willing to sell at the lowest price.

They don’t want to miss the trade, so these anxious sellers reduce their offer prices. Other anxious sellers see this and do the same thing. This can create a snowball effect that drives a downtrend.

There is resistance for McDonald’s around $285 for a reason. It isn’t a coincidence.

When shares hit resistance around $285 in June, some people who bought shares at that level regretted their decision. Some decided to hold onto their losing positions.

They also decided that if they could eventually sell at breakeven, they would. When McDonald’s rallied back to $285, they placed sell orders. The large quantity of these orders created resistance at the level again.

To be successful, a trader must understand how important psychology is. Buyer’s remorse can create resistance at price levels that previously faced resistance. These levels can be a logical place to sell.

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