What is overhead supply?

Overhead supply is a chart pattern that traders will typically try to avoid. It signals that the stock is likely not to make any big advancement in the near future.

What happens is people buy the stock during a long bullish uptrend. Then selling is introduced to the stock testing the rally and causing it to go down.

Investors who bought this stock during the uptrend and held it through the downtrend are felling bad about that decision. This causes them to want to sell at the first opportunity to break even.

That keeps the stock from making any meaningful advances in the future. It also keeps big investors who know what the pattern is away.

Volume The volume should be high during the uptrend and downtrend, but slows down once the pattern has formed.

Trading the pattern If the stock is traded a lot it might just break out of this pattern quickly and form an uptrend. In general, however this pattern can last for months or even years. Most traders will avoid them.