Trading stocks that hit new 52-week highs can be tricky. On one hand, the idea of a stock hitting a new high seems like a great time to buy the stock. On the other hand, what if it’s the 9th consecutive day of 52-week highs? Or, what if that same stock also broke to a new high a year ago and has been trending higher ever since? Doesn’t sound like that big of a deal, does it? Those 52-week high trades are the ones I see fail more often then not. So, what might make a good 52-week high breakout trade?
When it comes to entering a stock hitting a 52-week high, I look for ones hitting a “NEW” high. What I mean is, a stock that hasn’t hit a new 52-week high in a while. In addition, and more importantly, I want the stock to have broken through a key area of resistance. This way I know that it wasn’t just any move higher. One such stock that fits both of my criteria is that of Amdocs Limited.
To review Amdocs Limited’s stock, please take a look at the 1-year chart of DOX (Amdocs Limited) below with my added notations:
Although DOX has been trending higher for the last 9 months, the stock has run into resistance at $31 (red) on several occasions, my recently last Friday. You can also see the failed breakout attempt back in the beginning of July. Yesterday the stock finally broke through its key $31 resistance on a volume increase of 50%. This would be the “NEW” 52-week high resistance breakout I like to see. From here, the stock should be heading higher, most likely on a new uptrend.
The Tale of the Tape: DOX broke through its key resistance level of $31 to a new 52-week high yesterday. This should signal higher prices ahead for DOX. A long trade could be entered at this point, or on a pullback to $31, with a stop set below the $31 breakout point either way.
Before making any trading decision, decide which side of the trade you believe gives you the highest probability of success. Do you prefer the short side of the market, long side, or do you want to be in the market at all? If you haven’t thought about it, review the overall indices themselves. For example, take a look at the S&P 500. Is it trending higher or lower? Has it recently broken through a key resistance or support level? Making these decisions ahead of time will help you decide which side of the trade you believe gives you the best opportunities.
No matter what your strategy or when you decide to enter, always remember to use protective stops and you’ll be around for the next trade. Capital preservation is always key!
Christian Tharp, CMT