A critically important concept to learn in analyzing price movement of stocks is the principle of overhead supply. Overhead supply is when there are areas of price resistance in a stock as it moves up after experiencing a downtrend. These areas of resistance represent prior purchases of stocks and serve to limit and frustrate a stock's upward movement because the stock investors who made these purchases are motivated to sell when the price returns to their entry point. So it is normal that a number of stock traders who are already in "red" will sell when they see a chance to get their money back. Good chartists know how to recognize the price areas that represent heavy areas of overhead supply.

They will never make the fatal mistake of buying a stock that has a large recent amount of overhead supply. However, a stock that's able to fight its way through its overhead supply may be safer to buy, even though the price is a little higher.

Supply areas more than two years old create less resistance.