Shares of Eli Lilly and Company (NYSE:LLY) are trading higher on Wednesday. The company said that its Zepbound drug was more effective in helping adults with obesity lose weight than Novo Nordisk A/S's (NYSE:NVO) Wegovy. It cited data from a phase 3b trial.
But the rally may be short-lived. This is why Eli Lilly is our Stock of the Day.
The company said that using Zepbound led to a 20.2% weight loss. This was significantly better than the 13.7% weight loss that users of Wegovy experienced. But despite these results, technical analysis dynamics may put a ceiling over the stock.
‘Sell at former peaks' is an old expression on Wall Street. As you can see on the chart, this would have been good advice for traders of Eli Lilly.
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In July, the shares formed a peak around the $956.90 level. After a selloff, the shares returned to this level in late August. Once again, they found resistance and reversed.
In late September, the stock peaked around the $937.40 level. When the shares rallied back to this price in the middle of October, they ran into resistance again and another selloff followed.
The most recent peak in early November happened around the $846.50 level. Now the shares are approaching this level again. There is a good chance they run into resistance and reverse and head lower.
In the financial markets, there tends to be resistance at price levels that were previously resistance because of investment psychology. It is due to ‘buyer's remorse'.
There are traders and investors who purchased shares while they were at peaks who regret doing so when the price drops soon after. A number of them believe their decision to buy was a mistake and decide to sell.
But they don't want to lose money. So, they decide to be patient and hold onto their positions. If they can eventually get out at breakeven they will.
As a result, if and when the stock rallies back to their buy price, they place sell orders. If there is a large number of these remorseful buyers placing sell orders at the level that was previously a peak, it will create resistance again.
Some old Wall Street sayings can be good advice. ‘Sell at former peaks' is one of them. The chart of Eli Lilly proves it.
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