What is Overhead Supply?
- It is an area of resistance where there is more supply than you think.
- Example: If a stock is trading at $50 per share and has done a lot of trading at this level, eventually it will dip back down and may hit $20 per share. Many of the traders at the $50 level are holding onto the stock in order to break even. This is not a good mentality to have.
- If the shareholders didn’t get out at the $48 price point then they are waiting for it to come back to that price level.
- As the stock starts trending back up, there is an overhead supply area. When the stock hits it, it pushes the stock down further.
- In sum, overhead supply = an area of resistance that pushes the stock down further as the stock climbs back up from a dip.