Investors who are looking to actively trade stocks and other securities engage in technical analysis to find patterns and identify trends that can help predict the direction of a stock’s price. Many of these strategies, such as average daily trading volume (ADTV) and moving average look for changes in a stock’s momentum to help determine stock movement.
A frequently used indicator of a stock’s trend is to look at movement around its 52-week high and low. The purpose of this article is to define what the 52-week high/low is, the significance of 52-week high and low reversals, and what are some trading strategies that can help investors lock in profits.
What is the 52-week high/low?
The 52-week high and low for a stock represents the highest closing price and the lowest closing price the stock has traded at over a 52-week period. This is a moving number, so the 52-week high and low prices you see on July 17, 2018, are measuring the 52 weeks prior to that day. It is not limited to a calendar year.
Although markets do not always behave in an orderly fashion, price movement around a 52-week high or low is generally seen as a sign that stocks are ready to move in a direction that follows that movement. When there is price movement towards a 52-week high or low, you'll often hear that the market is "testing its high" or "testing its low". Traders are looking for momentum and generally, when they see price movement that creeps towards a high or low, they can count on other investors jumping in.
How accurate is the 52-day high and low?
It is significant to point out that the 52-week high and low is for the closing price of a stock. During any given trading day, a stock may move above its 52-week high, or below its 52-week low but ends the day somewhere between the previous high and low, the 52-week high and low remains unchanged. These intra-day movements, called reversals, while not changing the 52-week high or low can be significant to traders.
At one time, a move above the 52-week high or below the 52-week low was seen as a very reliable indicator of future price movement. However, as electronic trading has become available to more than just individual investors; stock price reversals at these thresholds have become more common. For some traders, this has made the 52-day high and low a less significant indicator.
What is the significance of 52-week high or low reversals?
When a stock climbs above its 52-week high but fails to hold that gain, it can be a technical indicator that the stock has “topped out”. Of course, it's also fair to say that there is still a "bullish" sentiment surrounding the stock, and in some cases, a stock will make multiple attempts before finally closing above its 52-week high. However, momentum traders typically view stocks that rise above, then fall below, their 52-week high as prime targets for profit taking.
On the other end, when a stock dips below its 52-week low but does not continue to go lower, it can be a technical indicator that the stock has reached a bottom. The classic technical indicator for this is a hammer candlestick (think of it as an upside-down capital T) pattern. For stock traders this may be a buying indicator since short sellers may start looking to close their positions and other traders will start buying because they predict the stock is now undervalued and ready to move up.
What are some trading strategies for the 52-week high/low?
One of the most common strategies for day traders is known as the "pop" strategy. This strategy is based on technical indicators but rooted in market psychology. The reasoning is that markets usually will test a high or low before ultimately breaching it. Traders that use this strategy look for a stock that has significant momentum indicating that it wants to break a high or low. Once the stock pulls back the first time, it may take anywhere from a few days to a few weeks for a stock to try to reclaim that position. As traders see the stock approach the 52-week high or low they should set a stop order just above or below (e.g. $0.25) the price where the stock crossed the 52-week line the first time. When the stock reaches that price the order will be executed and the trader can then set an appropriate stop loss to help them exit the trade.
Other successful trading strategies involve finding the 52-week high and low range. This is a very simple calculation. You subtract the 52-week low from the 52-week high. Once you know the range, you can determine the average weekly and daily volume. Here’s an example. Lowe’s has a 52-week high of $117.35 and a 52-week low of $75.36. The range is 117.35-75.36=41.99. Once you have this number you can divide by 52 to get an average weekly range of $0.81 cents or an average daily range by dividing by 252 (based on the number of trading days, not calendar days) and get $0.16 cents per day. Once you know the average daily or weekly range, you can monitor the stock for trends. Once identified, using the average daily or weekly range gives you a point to step stops for your trade.
So how do you use this?
First, you can use average daily or weekly range to look for breakouts especially at historically key price levels such as $10, $25, $50 or $100. Knowing the average weekly or daily range can help confirm price movement when stocks breach these levels higher or lower. However, a word of caution, especially for day traders, is that stocks can be prone to intra-day reversals meaning that a price may rise above the high but then fall below or vice versa. Since these can happen very quickly, it's important to set appropriate stops.
A second strategy is to put a mid-line between the high and the low. To establish the mid-line you will add the 52-week high and the 52-week low and divide by 2. In our example, 117.35 + 75.36 = 192.71 which when divided by 2 = 96.35. This would put your midline at approximately $96.35. You can then use this middle line to look for breakout patterns:
- If the stock price breaks above the middle line, that is a bullish indicator that suggests the price will increase towards the 52-week high.
- If the stock price breaks below the middle line, which is a bearish indicator that suggests the price will decrease towards the 52-week low.
- If the stock price reverses off the middle line, you can use the average daily or weekly range to trade in the direction of the bounce.
How to identify 52-week high or low stocks
Traders have easy access to a wealth of information, and you can be sure to find a number of online resources that will provide lists of stocks that have recently been trading at levels close to their 52-week highs and lows. But this only gets you so far. Once you identify the stock, there are some additional signals you can look for to determine which stocks merit further study.
- When a move above the 52-week high or below the 52-week low is accompanied by high volume (look at the volume that is 200% above the average daily trading volume – ADTV) that usually indicates sufficient momentum to propel the stock in that direction
- If a stock reaches its 52-week high and has a high percentage gain for a specific period of time, that can be a sign that there is momentum around that stock.
- From the fundamental analysis side of things, look for stocks that analysts have recently upgraded or downgraded. This can have a huge psychological impact on the market that can create the necessary momentum to push a stock price significantly higher or lower.
The 52-week high/low can be misinterpreted
Stock traders rely on technical analysis, but successful investors understand the role that fundamental analysis plays in investment decisions. This is true when attempting to accurately interpret the significance of a company breaching a 52-week high or low.
For example, when there is good news that pushes a stock close to or above its 52-week high investors that rely only on technical analysis may discount the news and look to sell only to find that the stock was only taking a brief pause before climbing well above its former high. Conversely, there can be fundamental factors pushing a stock towards its low, but traders may be reluctant to sell thinking that the bounce signals a bottom when in fact; it could just be a momentary blip on the stock’s downward path.
The bottom line on the 52-week high/low
Markets rarely move in an orderly, or even logical, fashion. But if you can identify changes in the 52-week high and low, traders can make more informed investing decisions. This is because a stock’s 52-week high or low represents a psychological indicator that can often create momentum. Buyers have a fear of missing out and sellers can look to cut their losses. Both scenarios can cause significant price movement.
Traders can easily find lists of stocks that have recently broken through their 52-week high or low. But that is the only indicator for selecting a stock to trade. Traders, particularly day traders, are looking for stocks that show the proper momentum. Because stocks frequently experience reversals around the 52-week high or low, day traders, in particular, like to use the "pop" strategy to forecast when a stock that made one failed attempt at the threshold will cross it. Another popular trading strategy is to look for trading strategies that use the 52-week high and low typically focus on calculating the weekly or daily range and then using that range to anticipate stock movement.
Movements around 52-week highs and lows are usually significant. But quantifying that significance requires that investors pay attention to both technical and fundamental indicators as they relate to that stock. Reversals around stocks 52-week high or low are common. When these happen, traders need to take a look at other technical indicators and even use fundamental analysis to determine whether a stock's move is temporary or whether it is primed to break through a top or find a new floor. Sometimes bad things happen to good stocks and sometimes a bad stock can temporarily benefit from favorable market conditions.
