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.