Shares of Micron Technology, Inc. MU are down on Monday, nearing a critical support level.
When stocks break through their support levels, they often continue to decline. Hence, we highlight Micron as our Stock of the Day.
Understanding technical analysis doesn’t need to be complicated. At its core, it’s about observing the balance between supply and demand.
If a stock price is falling, it usually indicates that demand (buy orders) isn’t sufficient to buy up the available supply (sell orders). Consequently, sellers may have to lower their prices to attract buyers, pushing the stock into a downward trend.
However, once a stock approaches a support level, the situation changes. Here, demand increases to meet the available supply. Sellers can offload their shares without worrying about decreasing the price further.
As illustrated in the accompanying chart, Micron has established support at around $86.60, a threshold maintained since August.
Support levels can persist over time, often due to what’s known as seller’s remorse. Traders who sold at these support points may regret their decisions if prices rebound shortly after.
Some of these individuals may choose to repurchase shares if they can do so at the same price. As a result, if the stock retraces to these prices, buy orders can re-emerge, reinforcing the previous support.
If the stock remains and trades below the established support level, it is considered broken. This signals a significant shift in the supply and demand dynamics.
It implies that the traders who previously created support with their buy orders may have completed their purchases or withdrawn their orders, signaling their exit from the market.
This scenario could lead to further declines in Micron’s stock price. Sellers might find themselves needing to lower prices to attract buyers once again.
This situation presents a risk of entering a new downtrend.
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