Shares of Redwire Corporation (NYSE:RDW) continue to move higher on Wednesday. They have gained about 200% in just a month. Traders don't know when this rally will end, and those who own the shares are analyzing possible exit strategies. This is why Redwire is the Stock of the Day.
‘Sell at former tops' is an old saying on Wall Street.
Many times, when a stock reaches the same level as a former peak, it encounters resistance. Sometimes, after encountering resistance, stocks roll over and head lower.
As you can see in the chart below, Redwire’s all-time high was $26.66. If the shares reach this level, they may hit resistance.
There are people who purchased shares at that price and have regretted it ever since. Many of them have decided that if they have the chance to finally exit their positions at breakeven, they will.
This means if the stock reaches levels around $26.66, these remorseful buyers will place sell orders. If there is a large enough quantity of these orders, it could create resistance at the level again.
Stocks sell off at resistance when some of the sellers who created the resistance become anxious and impatient. They become concerned that others will be willing to sell at a lower price, and they know this is where the buyers will go.
As a result, they reduce their offering prices. Other concerned sellers see this and do the same thing. It can result in a snowball effect that pushes the price lower.
In addition to getting close to a former peak, Redwire is also extremely overbought. It is trading well-above its typical or usual range.
Many trading strategies are based on the concept of reversion to the mean. If a stock is overbought, sellers will enter the market. They will be anticipating a reversion, or move lower, and their selling could push the price lower.
Nobody knows where the Redwire rally will end. But there is a chance it ends at a former peak.
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