|By Nathan Young|
July 25, 2017
This is not as much of an indicator as it is a matter of simple supply and demand. An example of the price ceiling could be the 52-week high on an equity or the all time high of an equity, as that indicates what the highest price people are will to buy the stock at.
Supply and demand work to move price around in an attempt to find a price the whole market can agree upon. Focusing primarily on the price ceiling, this is a level where people could either stop buying or people who are already in the market can begin taking profits off the table. The reason for this is the demand side is drying up and the buyers are no longer will to pay the current price for either fundamental reason or technical reasons.
When the price ceiling begins to move, this could be due to an increase in fundamental numbers or the market simply believes the stock is now worth more than what it previously was. Playing a price ceiling move can be difficult because the market has not been here before and is typically called market discovery. As the market begins to move higher, buyers are unsure where the resting place for the new ceiling will be and sellers to not want to enter the market too early in fear of continued appreciation.
Another aspect of price ceiling is that an equity may only be able to increase to a certain price before the ceiling stops the stock from increasing any more. By moving the ceiling, the market may push it higher, allowing for an increase in value. Ceilings can be in place for many reasons, but it is important to understand why the ceiling is there and why the people controlling it may begin to move it. Either way you use this term, be sure to fully understand what it means and how you can benefit from it.