Trading in Valero Energy Corp (NYSE:VLO) stock is quiet on Wednesday. But that may not be the case for long.
After gaining almost 40% since the April lows, many analysts and traders are anticipating some profit-taking. Stocks that are overbought and at resistance tend to sell off. This is why Valero is the Stock of the Day.
Resistance is a large group of traders and investors looking to sell at or close to the same price. Resistance can stay intact for long periods of time. This has been the case with the $142.50 level for Valero.
Back in October, the stock reversed and went lower after reaching this resistance. When this happened, some people who bought the shares came to regret doing so. They decided to hold on to their losing positions, but also decided to get out at breakeven if they could do so.
So, when the stock rallied back to this price in November, these disappointed buyers placed sell orders, creating resistance. Then the same thing happened; Valero sold off and went lower.
The stock returned to this resistance in January. Remorseful buyers placed sell orders at the level, creating resistance once again.
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Stocks can sell off of resistance when some of the traders and investors who created the resistance reduce their offering prices. They know that buyers will go to whoever is willing to sell at the lowest price and they don't want to miss out on the trade.
When other sellers see this, they do the same thing, which can result in a snowball effect pushing the price lower. This is what happened the last three times Valero reached this resistance.
Now, the stock is back to this important level once again and the overbought conditions will draw sellers who are anticipating a reversal into the market.
Stocks that are overbought and at resistance tend to head lower. It may be about to happen here.