The 52-week high for a stock represents the highest closing price that stock has traded at over a 52-week period. This is a moving number, so the 52-week high shown on a specific day is measuring the 52 weeks prior to that day.
Finding stocks at 52-week highs is a frequently used indicator of a stock’s trend. The purpose of this article is to define what the 52-week high is, the significance of 52-week high reversals, and some trading strategies that can help investors lock in profits on stocks trading near 52-week highs.
Why Do Investors Pay Attention to 52-Week Highs?
Investors who look to actively trade stocks and other securities use technical analysis to find patterns and identify trends to help predict the direction of a stock’s price. Many traders use indicators such as average daily trading volume (ADTV) and moving average to identify changes in a stock’s momentum that can help determine stock price movement.
With that said, markets do not always behave in an orderly fashion. However, price movement around a 52-week high is generally seen as a sign that stocks are ready to move in a direction that follows that movement. Traders look for momentum and generally. So when they see price movement that creeps towards a high, they can count on other investors jumping in.
Is the 52-Day High an Accurate Indicator?
The 52-week high listed for a stock is the closing price of a stock. During a trading day, a stock may move above its 52-week high. However, if it closes below the previous session high, the 52-week high remains unchanged. These intra-day movements, called reversals, while not changing the 52-week high can be significant to traders.
At one time, a move above the 52-week high 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 a less significant indicator.
What is the Significance of 52-Week High 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, but not always. In many cases 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.
What are Some Trading Strategies for Stocks at 52-Week Highs?
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 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. 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 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. Company ABC 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 number of trading days, not calendar days) and get $0.16 cents per day. Now that you’ve calculated the average daily or weekly range, you can monitor the stock for trends and use the average daily or weekly range as a point to set stops for your trade.
So how do you use this to make money?
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, including MarketBeat, that provide lists of stocks that have recently been trading at levels close to their 52-week highs.
But this only gets you so far. Once you identify a 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 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.
Limitations of the 52-Week High
Many 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.
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.
Some Final Thoughts on a 52-Week High
Markets rarely move in an orderly, or even logical, fashion. But if traders can identify changes in the 52-week high, they can make more informed investing decisions. This is because a stock’s 52-week high or low represents a psychological indicator that often creates 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. But that is 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, 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 typically focus on calculating the weekly or daily range and then using that range to anticipate stock movement.
Movement around 52-week highs is 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 a stock’s 52-week high are common. When these happens, 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. Sometimes bad things happen to good stocks and sometimes a bad stock can temporarily benefit from favorable market conditions.
MarketBeat All Access