Trading in Mohawk Industries, Inc. (NYSE:MHK) is quiet on Tuesday. But that may not be the case for long. Traders are waiting to see if it will break out and trend higher.
Sometimes, traders have difficulty knowing whether or not something is a true breakout; a false breakout or a bear trap. These can mean a fast reversal and move lower. This is why Mohawk is the Stock of the Day.
Check our how MHK is doing here.
Resistance is a price level or a narrow range where there is a large amount of sell interest. At resistance, the sellers can overpower the buyers and push the price lower. This could result in a new downtrend for the stock.
Sometimes when a stock reaches resistance, the buyers overpower the sellers and the price moves higher. This is called a breakout. It is considered to be a bullish dynamic.
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It shows that traders and investors who created the resistance have either canceled or finished their orders. With this large amount of supply off the market, the stage could be set for a move higher.
Sometimes a stock can get above resistance, but the sellers are still active. They have just been patient and can decide to get into the market, and this could push the price back below the resistance.
This is called a false breakout or bear trap.
One way for traders to determine whether it is a confirmed breakout is to see if the level that had been resistance turns into support. This occurs when traders who sold at the resistance decide to buy their shares back at their sale price after the resistance breaks.
When the stocks fall back to what had been resistance, they place buy orders. This can be a setup for a new uptrend to form, and it can be seen on the chart of Mohawk.
The $114 level was resistance, and then it turned into support, and a move higher followed. The same thing happened at the $121 level.
Now traders are watching to see if the same thing occurs with the $130 level. If it does, the stock may be about to make another move up.
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