Anticipating All Time Highs

Building set ups that are in accordance with underlying market structure can increase probability and enhance returns.  In order to find these anomalies of market structure there are plenty of white pages available.  One such anomaly is the influence of new 52-week highs and momentum.  Long before this anomaly of market structure was studied academically, traders such as Darvas were able to develop set ups to take advantage, with great success.

Investors use the 52-week high as an “anchor” which they value stocks against. When stock prices are near the 52-week high, investors are unwilling to bid the price all the way to the fundamental value. As a result, investors under-react when stock prices approach the 52-week high, and this creates a 52-week high effect.  Quantpedia

At any given time there can be hundreds of stocks making new highs so having a filtering process is crucial.  A fairly effective way to screen for candidates is to refer to public domain information and strategies.  Taking the structural edge of new 52-week highs and building additional criteria for candidates, one could take the conditions of a new high on a gap up with large volume and then stalk until price action conforms to one's set up.

A few recent examples:

SHAK

TER

These two examples highlight the two likely paths a stock will take after expanding to new highs.  A run away move or a pullback.  In both situations the same set up can be screened.  The primary difference is that in the former, one is waiting for price to pullback before squeezing towards the recent high, and in the later a rebound in price action before squeezing towards a new high.  The 10 period moving average of price is an effective means of representing this price squeeze visually.

With a fairly tight stop, these trades offer a solid possibility of catching 2-1 moves intraday.  Being aware that there are likely buyers at the new high price point, one would look to have a signal before the actually high is clipped in anticipation that buyers will step in.  Acknowledging that there may also be doubters, the swiftness with which price moves in favor of the trade is a good tell if one is on the correct side of the order flow.

The Next Leg

Thrust

Over the past few trading sessions the dam burst and a sizable breadth thrust is under way.  There have been numerous price swings of magnitude to the upside that, should price action compress through time over the next 5 to 10 trading sessions, will set many of them up for their next pivot swing.  This is the time to focus on curating a stock list of extreme price/volume expansions.

One of the simplest means of scanning for these moves is to refer to the collective trading wisdom of traders past and focus upon 100% moves.  This knowledge of this phenomena has been passed down for generations long before it had been quantified.  The more tried an true variant of this is to scan for stocks that are up 100% year over year, however there are some flavors for shorter time frame traders that are worth investigating.  One of these is noted by Mark Minervini in his book, 'Trade Like a Stock Marker Wizard.'  On page 253 he writes about his Power Play which describes a stock that moves up 100% in under 2 month period and to follow this for two to three weeks thereafter.

Stocks That Double

Studies of momentum trading inform us that stocks that have high velocity moves over shorter periods have a strong tendency to revert.  This helps act as a filter to separate the wheat from the chafe.  Stocks that persistently maintain a double ratio are worth keeping on a focus list while those that revert can be pruned.

Persistently Doubles

Spike and Reverts

Scanning list of multiple moves over varying time frames can assist in curating a focus list of stocks that are participating in the current thrust and will persist and compress through time or revert in price.  For myself I look at stocks that are up 20% over my standard time frame and stocks that are up 25% for the month, continually looking to exploit 4 to 5 20% moves as they make their way to 100%.

20-25% Moves

Weekend Review 09-08-2019

Stabilization

Over the past couple of weeks stocks have shown stabilization.  Much of the damage that began in early August hit peak declines by mid.  During this period there were a handful of days with significant breakdowns, but since August 23rd breakouts have been accumulating.

Breakouts/Breakdown

The number of breakouts over this time period has been consistently positive and expanding more frequently to the upside than the down side.

10 Day Buying - Selling

Highs across multiple time frames have positive traction.

New Highs/New Lows

After a period of flat lining the number of stocks in my 3 month momentum scan have shown a slight uptick.

Momentum Universe

Ideally these metrics will continue to improve.  Continued green shoots across multiple time frames.  More breakouts than break downs.  Expanding new highs.  Expanding tradeable universe.  The next piece of the puzzle to begin to determine aggressiveness in this market is to see the magnitude of moves over three months expand.

Expansion of Stocks > 25% over 3 Months

Expansion of Stocks > 13% Over 6 Weeks

August 2019 Monthly View

There are multiple ways to take the temperature of stocks and assess whether they are healthy, suffering a slight cold, sickly, or feverishly unwell.  Given the usual caveats regarding indices and how they tend to lag the underlying vehicles when stocks decline from peaks and rise from bottoms, there are still ways to use them as a thermometer.

As someone who focuses mostly on stocks across a 3 and 6 month time horizon, where the indices are in relation to a 6 month average is important information to me.  As denoted in the following NASDAQ chart, serious corrections in stocks will frequently make a dent on the index over this time frame.

COMPQ 6-Month

Addressing the SPY, a similar pattern emerges.

SPY 6-Month

As of now, the basket of stocks that compose the COMPQ and SPY are behaving in tandem and not visible distressed as of the end of August.  However, the basket of stocks that compost the NYSE and IWM are visibly in tandem with each other and in opposite direction overall when viewed against the COMPQ and SPY.

NYSE 6-Month

What can be visibly and empirically assessed when looking at the NYSE is that during serious corrections the 6 month average will be in decline with multiple closes below.  That going back to 2018 there has not been a new high made by this basket of stocks and they have never fully recovered from their most recent significant correction.

The IWM is showing similarities in behavior to the NYSE. 

IWM 6-Month

Unlike the NYSE however, the correction in the underlying basket that compose the IWM continues to weaken as the monthly close is below a declining 6 month and below the 2 year average.

Coming into September what is abundantly clear is that market volatility and price swings have been the norm in August.  Through it all the COMPQ and SPY have pulled in approximately 7% in keeping with statistical averages.  Stocks that compose the IWM and NYSE as a group have struggled and have gone through 12-18 months respectively without a new high.  The underlying weakness as exhibited by the two indices has not spread further into the stocks that compromise the COMPQ and SPY. 

It remains to be seen if the stocks responsible for the bulk of the moves on these indices continue to do so, dumb down to the laggards, transition through rotation, or the laggards catch up, but what can be seen currently is that stocks are not in lock step to the downside overall.  If anything that is reason enough to remain optimistic unless and until the judgment of stocks tells otherwise.