Overhead supply refers to buyers who entered a trade near a high and are now waiting to sell as the stock has had a significant drop in price. These buyers are waiting for the price to rise close to the price they paid so they can get out of the trade with a minimal loss.
The challenge with overhead supply is that these buyers can create resistance to upward price movement.
Beyond Meat soared in the first few months after its IPO, as shown below:
This large price move, followed by a significant price drop over the following weeks created overhead supply, buyers are now trapped and waiting for the stock to get back near its high.
Is Overhead Supply of Concern?
Overhead supply in and of itself isn’t a reason to toss aside a stock, it’s simply one of many criteria to consider in your decision process.
On the other hand, stocks that have moved past the area of resistance created by overhead supply may be worth consideration as they’ve shown strong enough demand to move up and through the resistance.