A 52 week high is the highest price that a stock has traded at in the last year. Many investors use 52 week highs as a factor in determining a stock's current value and as a predictor of future price movements. What you need to know about 52-week high stocks.
A 52 week high is the highest price that a stock has traded at in the last year. Many investors use 52 week highs as a factor in determining a stock's current value and as a predictor of future price movements.
What You Need to Know about 52 Week High Stocks
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 highs and lows. Looking at 52 week highs and 52 week low stocks can be very important in determining whether you should invest in a stock.
What Is a 52 Week High?
The 52 week high for a stock represents the highest closing price and the stock has traded at over a 52 week period. This is a moving number, so for example, the 52 week high and low prices you see on October 2, 2019, 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 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, you'll often hear that the market is "testing its high.” Traders are looking for momentum and generally, when they see price movement that creeps towards a high, they can count on other investors jumping in.
How Accurate Is a 52 Week High?
It is important to point out that the 52 week high refers to 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 if it ends the day somewhere between the previous high and low, the 52 week high and low remains unchanged. These intraday movements, called reversals, can be significant to traders, even though the 52 week high or low remains unchanged. With stocks that have high volatility, this may happen a lot, so be sure to consider these ideas when adding some of the most volatile stocks to your portfolio.
In the past, analysts viewed an increase in the 52 week high 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 week high a less significant indicator.
Why Do 52 Week High Reversals Matter?
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, high stocks 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.
Trading Strategies for 52 Week Highs
One of the most common financial 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 will usually 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 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 average 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 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 intraday 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 Highs
Traders have easy access to a wealth of information and metrics. You can find a number of online resources that will provide a list of stocks on the stock exchange that have recently been trading at levels close to their 52 week highs. 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 and could produce a good return.
- When a move above the 52 week high 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 time period, that can be a sign that there is momentum around that stock.
- From the fundamental analysis side of things, look for stocks that an analyst or two 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 and are sometimes some of the best cheap stocks to buy.
Another important tool in identifying 52 week high stocks is a stock screener. Stock screeners are found on many websites and trading websites and let an investor put in certain criteria (for example, market cap, simple moving average, stock market gainers, stocks recommended by financial experts, stocks that just hit their highest level, etc.) and then only shows stocks that match that criteria. For example, an investor could filter so that they only see stocks that offer a dividend, if they’re using a dividend investing strategy. You can use a stock screener to track the 52 week price changes and help determine the selling and buying you need to do to make the most money.
The 52 Week High 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. It is usually a good idea to look at what a well-known analyst says and get investment advice from them and another reliable financial advisor before you decide to invest in a stock.
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.
Should You Buy a Stock at Its 52 Week High?
Markets rarely move in an orderly, or even logical, fashion. But if you can identify changes in the 52 week high, traders can make more informed investing decisions. This is because a stock’s 52 week high 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. Make sure that you look at all of the factors that influence stock price and risk and gather all the data you can before adding a stock to your portfolio
Traders can easily find a list of stocks that have recently broken through their 52 week high. But that is not 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, 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 at the 52 week high level and low level of a stock and focus on calculating the weekly or daily range and using that range to anticipate stock movement.
Movements around 52 week highs 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 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 even the best growth stocks and sometimes a bad stock can temporarily benefit from favorable stock market conditions.