Page 352 - THE MARKET WHISPERER

348 PART 10 - Winning Trades

Taking Advantage of Round
Numbers

Stocks find difficulty in going beyond round numbers. When a stock is
trending up and hovers below a round number, it will generally encounter
resistance and withdraw. Round numbers serve as precise points for
resistance and support. The “rounder” a number is, the stronger its support
or resistance will be. Numbers ending with fifty cents, such as $28.50, also
serve as areas of support and resistance. A figure such as $40 is rounder
than $35, while $50 is rounder than $40, and so forth.

Why do stocks stop at round numbers? They hold psychological
significance. We view them as stronger and more whole, even though there
is no mathematical basis for this view. Think about that next time you’re
considering a purchase priced at $9.99.

Let us presume that an average investor has bought the ABC stock at
$44.28. Generally, following the purchase, the broker or banker will ask
that investor, “If the stock rises, at what price do you wish to realize your
profit?” Most likely, the investor’s answer will be a round number, such as
$50. Can you imagine a situation in which the investor will tell the broker
to sell at $49.98? Since the majority of investors makes the same exact
mistake and sets their sale orders at round numbers, when the stock
reaches that number, a stream of sell orders accrued by brokers over
anywhere from months to years is automatically set into motion and the
large supply of sellers at the precise round number stops the stock from
moving. When that happens, buyers who bought at the peak begin to lose
their patience and sell. The number of sellers eventually outweighs the
number of buyers, and the most likely outcome is that the stock price will
drop. How far might it go down? No one knows that.