What Is Price Persistence?
Price persistence is the tendency of a security's price to continue moving in its present direction. A stock that has been in a strong upward or downward trend for weeks is displaying price persistence. Conversely, a stock that has been trading in a choppy manner for an extended period of time will display a low degree of price persistence.
- Price persistence is the ability of a stock to continue moving in the trending direction.
- Price persistence lasts until there is a shift in supply or demand that reverses the trend.
- Eventually, all trends end with a reversal; investors can profit by riding a trend while it persists.
What Does Price Persistence Tell You?
Price persistence is essentially the trend in a security, and how strong that trend is. Price persistence in some stocks may last only a week, while in others it may last months (or even years). Price persistence doesn't necessarily mean there won't be corrections against the prevailing trend direction—there often will be. It just means that those corrections or pullbacks are relatively short-lived, with the trend direction taking over after the pullback.
While the rules of physics don't necessarily apply to stock prices, price will change direction when another force acts on it. These other forces are supply and demand, which may align with pre-existing resistance and support levels.
Assume that a stock is trending higher. It is trending higher overall, yet will still have short-term drops in the price, followed by moves back to new highs. As the price nears a support level on a pullback—such as a rising trendline or a popular moving average—demand for that security may increase. Similarly, since the price has already fallen, supply—the number of people remaining who wish to sell—may also start to dwindle. These forces result in pushing the price back up. With strong price persistence this happens quite quickly, as there is much more demand for a stock (uptrend) than there is supply.
The reverse is true for a downtrend with persistence. As the price drops, it may have short-term rallies, even the overall movement is lower. But since the price trajectory is down, there may be fewer people who wish to buy, and many people who wish to sell. As the price bounces higher, the demand—the number of buyers remaining—is reduced, while the supply stays steady or increases. This results in the price moving back down. The more quickly this happens, the more persistence the price is showing.
Example of How to Use Price Persistence
The following chart of Shopify Inc. (SHOP) shows price persistence in multiple ways and on different time frames.
Initially, the stock is rising with few pullbacks and corrections. For nearly a year the price showed strong price persistence in this way.
This period was followed by larger correction, which formed a cup and handle pattern. After moving off the bottom of the cup, once again the stock showed strong price persistence to the upside. The persistence may have continued, although Covid-19 and pandemic fears pushed nearly all stocks lower as investors looked to exit securities and move to cash.
This sell off, while steep, was short-lived. The stock showed strong price persistence rallying to new highs very quickly. No security trend, no matter how strong, lasts forever. There are always reversals. Typically, the bigger the trend, the larger the reversal to follow.
Follow the trend and profit from it while it is there, but get out when corrections become larger than they have been. When corrections or pullbacks get larger, this can be a sign that the trend is losing momentum: The persistence is breaking.
The Difference Between Price Persistence and Relative Strength
Price persistence is when the price of a security trends in a direction for an extended period time. It doesn't involve comparison to other securities. Relative strength is looking at how the strength of the trend in one security compares to another. If two stocks are in a uptrend, but Stock A has climbed more than Stock B, then stock A has relative strength compared to Stock B.