When a stock surges higher over several days or weeks, it attracts more attention. Such moves are typically unsustainable, though (in the short-term), hurting those that buy late in the move. And if the stock surges into a resistance zone, it may be time to consider taking profits (selling) instead of buying. Resistance is an area where the price has struggled to move above in the past. It is not a prediction that a stock won't move above resistance, rather, it is just a cautionary area. Below are stocks that have been strong recently, but are butting up against resistance. A breakout above these resistance levels could signal a long-term advance, but failure at resistance signals a significant decline over the next several months.
CEMEX, S.A.B. (CX) reached a multi-year high at $14.37 in 2014 and hit a low of $3.64 in January 2016. That downtrend looks to have ended when the stock rallied aggressively in February through April, and again in July through August. There is resistance between $9 and $9.35, which has been tested three times since August, and the price is once again approaching that level. The stock closed at $8.84, following a 6.51% jump on Jan. 20. If the stock can break above resistance, this uptrend will continue, targeting $11. The downside is that if the price doesn't break, though (or can't hold above) resistance, then it is likely to collapse back toward support between $7.70 and $7.19.
Rexnord Corporation (RXN) is also at one of these inflection points. This stock was in a downtrend since 2014, after it peaked at $30.94. Rexnord rallied at the start of 2016 but stalled in April at $22.97. Throughout 2016 the stock tested the $22 to $23 region four times, and it is testing it again on Jan. 20 following a 2.87% rise ($22.19 close). The entire area between $22 and $23 is resistance, having turned the price lower multiple times. If the price continues to rally through $23 the upside target is $27.50 to $28. If the price declines from here, support is between $19.50 and $18.35.
Teekay Corporation (TK) traded as high as $67.98 in 2014, before plummeting to $4.37 in January of 2016. The price has stabilized above that level, with resistance forming near $10.50 and $11.85 over the last year. The higher swing lows going back to early 2016 are a bullish sign, but the price will still need to rally above $10.50 and $11.85 to signal investors do in fact believe a bottom is in place. The stock moved up 6.61% on Jan. 20 to close at $10.16. Above $11.85, the next upside target is $17.42—where the price gapped lower from in Dec. 2015. If the price falters at resistance, there is minor support near $8 and more substantial support near $6.
The Bottom Line
Traders can easily get trapped into thinking about only the upside in a stock. While a stock could continue breaking through resistance, it may not. Consider the downside if the breakout doesn't happen. Weigh the options on where you will get out, how you will control risk and whether you are willing to hold the stock through multiple up and downs, which may still result in the stock going lower (or higher). Resistance isn't necessarily a sell signal, but it is a place to use caution for both holding long positions or initiating new ones.
Disclosure: The author doesn't have positions in the stocks mentioned.