Stock Of The Day: Breakout Time For D.R. Horton?

D.R. Horton, Inc. (NYSE:DHI) shares are trading higher on Monday. They may be on the verge of a breakout, and if this happens, there is a good chance a new uptrend forms.

This is why it is the Stock of the Day.

DHI stock is moving higher. Check the price action here.

In financial markets, certain price levels have more importance than others. These are called support and resistance levels.

Support is a price level or narrow zone where there is a large amount of buy interest. Stocks stop going down when they reach support levels.

Resistance is the opposite. It is a price level or narrow zone where there is a large amount of sell interest. Stocks stop moving higher when they reach resistance.

An amazing dynamic in markets is how what had been support can convert into resistance. This can be seen on the chart of D.R. Horton.

In late October, the stock went into a free fall. The selling ended when the shares found support around the $151 level. People who bought at this level were happy they did so because the stock rallied after.

But in December, the support broke and the price fell below it. When this happened, some of the buyers came to think they made a mistake.

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A number of them decided to hold onto their losing positions, but also decided that if they could eventually exit their positions at breakeven, they would do so.

As a result, when the stock rallied back to around $151 these regretful buyers placed sell orders. The large concentration of these sell orders formed resistance at the same price that had previously been support.

Sometimes a stop looks like it was going to break resistance, but it makes a quick reversal back down. This is known as a false breakout or bull trap.

But sometimes the buyers overpower the sellers at the resistance and the prices moves higher. Traders say this is a breakout.

Breakouts show that the sellers who created the resistance have either finished or canceled their orders. Either way, they are gone.

This sets the stage for a move higher. Buyers will be forced to be aggressive and outbid each other if they wish to draw new sellers into the market. This could force the stock into a new uptrend and it may be about to happen with D.R. Horton.

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