How to use 52-week high/low levels in trading and bet on a trend

The 52-week high/low levels, wherein the stock or index crosses one-year high/low, are considered vital indicators in markets as breaching these levels are seen as a confirmation that the trend is likely to continue, with ferocity, in the respective direction.

Investors and traders believe that the stock crossing the 52-week high or low level has a firm underlying strength / weakness, which may lead to a secular movement in the counter.

In general, 52-week high represents a resistance level and 52-week low the support levels, and their breach is considered a key development.

Significance of 52-week high/low

-- The breakout point – any breach of these levels sparks a new trend.

-- Investors regard stock claiming new 52-week high/low as the ones likely to witness strong trend in upcoming sessions.

-- Many intraday traders monitor such stocks to make quick gain.

-- Whenever the stock price depicts strength, the momentum is expected to be stronger in the respective direction.

-- The overall market is recognised as bullish when maximum stocks have either claimed a new high or are trading above the previous highs and vice-versa.

Traders and investors consider 52-week levels as crucial elements in the stock market as they assist in determining the future prices. It is believed that the stock prices hitting these levels may lead to a shift in sentiment and the firm momentum in the respective direction. Also, maximum participants are likely to take a keen interest in stocks that are on the verge of breakouts, and even more so when they are scaling new 52-week high levels.

The price-volume strategy focuses on stocks that show movement in the stock price, supported by volume. When a stock claims a new 52-week level, the theory indicates more activity in the stock for coming days. Upon establishing a firm move on the closing basis, the trend is expected to hold the respective bias for a short-term view.

Whenever the structure is supported by other technical indicators like Relative Strength Index (RSI), Moving Average Convergence Divergence (MACD), stochastic, etc the trend confirmation is even more concrete.

Keep a tab on up/down move

If a stock fails to hold the new 52-week high in intra-day session and closes in the red, it illustrates that market participants are preferring to exit stock and stay on the sidelines. In such a scenario, if the stock shows momentum in the next two sessions and regains the higher levels, the optimism and the stock's strength is expected to propel it to uncharted territory.

However, if the stock fails to recover and gain momentum in the next two sessions, it is highly advisable to exit positions and wait for the stock to gain sustainability. Such situations are hardly seen in the trending or bullish market though. On most occasions, the stock is expected to show a reversal and build more optimistic sentiment. CLICK HERE FOR THE CHART