It is an area of resistance where there is more supply than you think.
Example: If a stock is trading at $50 per share and has done a lot of trading at this level, eventually it will dip back down and may hit $20 per share. Many of the traders at the $50 level are holding onto the stock in order to break even. This is not a good mentality to have.
If the shareholders didn’t get out at the $48 price point then they are waiting for it to come back to that price level.
As the stock starts trending back up, there is an overhead supply area. When the stock hits it, it pushes the stock down further.
In sum, overhead supply = an area of resistance that pushes the stock down further as the stock climbs back up from a dip.
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