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The Novo Nordisk chart illustrates two common technical analysis dynamics that successful traders can use to profit.

As you can see, the $123 level was support for the stock in April. Then it was support again in early August. And after a recent move higher and a reversal, the stock found support around the same level again.

Support can stay intact for an extended time because of investor and trader psychology. It is because there are traders who sold while the stock was at support. But right after they were done selling, the shares rallied.

When this happened, many of these sellers came to regret their decision to get rid of their shares. Some of them decided to buy their shares back. But, they will only do so if they can buy the shares for the same price they were sold.

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So, when the stock reversed and eventually returned to the support level, these remorseful sellers placed buy orders. And there were so many of these buy orders that it created support at the level which had been support before.

Seller’s remorse can make support levels stay intact for an extended period of time.

When a stock drops to a support level, there is a tendency for them to reverse and rally. This is also because of psychology. It happens because some of the buyers experience anxiety.

These buyers are worried they will miss the trade. They know that the sellers will go to whoever is willing to pay the highest price.

As a result, they increase the prices they are willing to pay. Other anxious buyers see this and do the same thing.

This results in a bidding war that pushes the price higher.

If understood and interpreted correctly, technical analysis is the study of investor and trader psychology. Seller’s remorse can cause support levels to stay intact for an extended period of time. Buyer’s anxiety can make stocks rally after the drop to support levels.

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Photo: Shuttersotck