As a pure investor, I am “not bounded” to any of the stock counters that I am vested in nor intending to invest in. I don’t buy stock because I like the brand, the products or services, the industry etc. No sentiments, no brand loyalty, no hard feelings. I invest in them because they were low price or under-valued as opposed to potential future value at that point in time.
While there are many variables to consider when making the right trade, one of my favourites is the 52-week High/Low.
Simply put, the 52-week High/Low is the highest and lowest price the stock has traded from the previous year till to date. For me, its importance lies in the determination of current value and prediction of future price movement.
The 52-week High typically represents a resistance level while the 52-week Low a support level.
Investing on Breakouts
It is not uncommon for investors to begin showing increased interest as traded prices starts to hover around the 52-week High/Low. When price starts to blast past the 52-week High or blow beyond the 52-week Low, traders may begin to accumulate positions for BUY and SELL respectively. Why?
The rationale is this: if price breaks out of the 52-week range, more often than not, sustained momentum will continue the push in the same direction.
According to a 2008 market research, volume of trading spiked once a stock crossed the 52-week barrier. Small stocks crossing 52-week highs produced 0.6275% excess gains in the following week. Large stocks produced gains of 0.1795%. Overall, trading ranges had more of an effect on small stocks as opposed to large stocks.
Investing on Reversals
While 52-week Highs represent bullish sentiment, investors often use 52-week Highs as an indicator to lock in some or all profit gains. These same investors are prepared to give up potential price appreciation. Stocks making new 52-week Highs are most susceptible to profit-taking. This is why we see resulting pullbacks and trend reversals. Also, stocks hitting 52-week High intra-day but closed off negative may have topped out.
Similarly, 52-week Lows represent bearish sentiment, but presents an opportunity for bargain hunters to enter the sidelines. Stocks that make consecutive daily 52-week Lows are most susceptible to strong bounces when a daily hammer forms. Stocks hitting 52-week Low intra-day but fails to close off as a new Low may indicate signs of bottoming out.
What does it mean for me?
Technically I spend relatively little time on price movements and thus can afford to look at the spectrum of market or even across a few markets. I usually only identify & monitor fundamentally strong companies who are nearing their 52-week High/Low and self-assess the BUY/SELL/HOLD move.
Do you involve 52-week High/Low as part of your trading strategy?