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Why Buy a Stock Trading at a New High?

June 17, 2014



One of the most common phrases you hear in the stock market is “buy low and sell high.” These words have become synonymous with the way most people think about how to make money in stocks. Of course, it’s obvious that you have to buy at a price lower than the price at which you sell to make a profit. However, this does not mean that you have to buy at or near the lowest price at which a stock has traded historically.

 

Markets are far more often correct than are personal opinions or even expert forecasts. A stock making a new 52-week high during the early stages of a fresh bull market could be a stellar performer in its infancy. In contrast, a stock near its 52-week low at best has overhead supply to work through and lacks upside momentum; worse still, such a stock may be headed for a series of lower lows.

 

A stock hitting a new high has no overhead supply to contend with. The stock is saying, “Hey, I have something going on here, and people are taking notice,” whereas a stock hitting a new low is clearly a laggard that lacks investor interest or is being dumped in size by institutions.

 

There are those of you who say, “I don’t want to wait until the stage 2 criteria are confirmed.” You want to try to get in early, when the stock is moving off its lows. The problem here is that there is no confirmation in the early stages. How do you know that the stock is attracting institutions? Even a good start can get derailed if the fundamentals aren’t really there, and you end up buying a bounce that fizzles and the stock stays in stage 1 limbo or, worse, breaks down and declines.

 

When a stock reaches a new high in a confirmed stage 2 uptrend supported by big volume clues, it has been propelled upward by institutions taking positions because they believe that the fundamentals are solid and the prospects for the future are even better.

 

The only way a stock can become a superperformer, moving from, say, $20 to $80, is for that stock to make a series of new highs repeatedly, all the way up. The same thing applies to a stock that’s at $50 and doubles to $100 on its way to $300. Monster Beverage (MNST) registered an all-time high in late 2003. If you were afraid to buy the stock because it appeared too high, you would have missed a huge opportunity; the stock price advanced 8,000 percent by early 2006.

 

Excerpt from Trade Like A Stock Market Wizard by Mark Minervini (McGraw Hill Publishing –2012)

 

 



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