At times you refer to overhead supply. What is it? (April 10, 2000)

  Overhead supply refers to those buyers who bought a stock at its recent highs before it sold down. After the early year rally in the NASDAQ, there are many investors holding stocks at a cost basis higher than the current stock price. The problem with overhead supply is that those holders tend to sell into each rally attempt, putting pressure on the rally and ultimately squelching it. The rally has to be really strong to overcome recent overhead supply.

The overhead supply does not last forever. Stocks that base out for several weeks (usually 7 is the minimum for patterns such as cup with handle) or months lose the overhead supply effect as those who bought on the high sold out. That gets rid of the first wave of sellers. The last wave is taken care of on the shakeout before the final move up.

It does not always take a stock several weeks to return to a new high after selling back after a rally. Strong stocks can bounce right back, but if the market is weak and undecided as we have seen of late, new buyers are sucked in and then are forced to sell on the next move up.

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