NVIDIA Corporation (NASDAQ:NVDA) shares are trading lower on Thursday, and traders are watching the price action closely.
Sometimes when stocks break out, there are signs that the move higher will continue. This is why NVIDIA is the Stock of the Day.
A ‘breakout' occurs when a stock exceeds a resistance level and holds above it.
Traders consider this a bullish dynamic. It shows that the traders and investors who created the resistance have left the market.
With these sellers out of the way, new buyers will have no choice but to be aggressive and willing to push the price higher. This will force the shares into an uptrend.
But sometimes a stock looks like it may have broken out, only to reverse and give back much of its gains. This is called a ‘false breakout' or ‘bull trap.'
One way traders can anticipate if a breakout will continue is to look for certain price action. If a stock breaks out and then reverses, the price that had been resistance might convert into a support level.
This can be seen at the $196 level on Nvidia’s chart. It was resistance in November and February. After this resistance broke, the shares consolidated, and the level became a support level.
This was a signal that the move higher would continue.
If the $208 level doesn't hold as support, a meaningful move lower may follow.
If this happens, there is a good chance the shares will find support again around $196. There tends to be support at former support levels.
Some of the people who sold shares around $196 regretted doing so after the stock moved higher. A number of them have vowed to buy their shares back if they could get them at their sale price.
This means if Nvidia drops back to $196, remorseful sellers will place buy orders. If there is a large number of these orders, it will create support at the level again.
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