|Short-term traders discover great rewards in
uncharted territory. Stocks at new highs generate unique
momentum properties that ignite sharp price moves. But
these dynamic breakouts can also demonstrate very
unexpected behavior. Old battlegrounds of
support/resistance disappear while few reference points
remain to guide entry and exit. In this volatile
environment, risk escalates with each promising setup.
||The final breakout to new highs completes a stock's
digestion of overhead supply. But the struggle for
greater gains is far from over. Issues reaching new
highs often undergo additional testing and preparation
before resuming their dynamic uptrends. The skilled
trader can follow this building process through the
typical pattern development expected during these
|Price may return to test the top of prior resistance
several times. This can create a variety of stepping or
basing ranges before trend finally moves sharply upward.
Other times, stocks will immediately go vertical when
new highs are printed. The challenge is to decide which
outcome is more likely.
Use Accumulation-Distribution analysis to predict
whether new highs will escalate immediately or just mark
time. Price either leads or lags accumulation. When
stocks reach new highs without sufficient ownership or
buying pressure, they will often pause to allow these
forces to catch up. Other times, accumulation builds
more strongly than price. The initial thrust to new
highs confirms this accumulation. The breakout triggers
a new round of buying interest and price immediately
takes off with no basing phase.
On Balance Volume and similar accumulation-distribution
indicators are essential tools to evaluate the strength
of new high breakouts. Expect an immediate upward thrust
when OBV draws a pattern more bullish than the price
chart. Alternatively, when multiple acc-dis readings
show ownership limping behind price, prepare for an
extended basing period. And always use caution with
NASDAQ stocks. Their odd transaction reporting may lead
to false OBV readings.
Final phases of congestion often print sharp initiation
points for the breakout impulse. Locate this hidden root
structure in double bottom lows embedded within the
congestion just prior to the trend move. The distance
between these lows and the top resistance boundary will
yield price targets for the subsequent rally. Barring
larger forces, this new high breakout should extend no
more than 1.38 times the distance between that low and
the resistance top before establishing a new range.
Once price clears a new high base, the bull impulse
escapes the gravity of final congestion. This often
triggers a dramatic 3rd wave for the trend initiated at
the congestion low. This thrust can easily exceed
initial price targets when it converges with larger
scale wave movement. In other words, when forces in the
daily and intraday charts move into synergy, trend
movement will inevitably be more dramatic than
|When complex basing
occurs early in a dynamic uptrend, alternation
predicts major price thrusts with few
retracements. This CMGI parabolic move supports
that theory. Note the extended range at the
right shoulder of the Inverse Head & Shoulders
pattern, probably driven by inadequate
accumulation. Once the building process was
complete, price ejected into an astounding
Measure ongoing new highs with a MACD Histogram or
other widely used momentum indicator. Whatever your
choice, allow your math to support the pattern rather
than the other way around. For example, if an
established trendline can be drawn under critical lows,
key your trade timing off that line rather than waiting
for your indicator slope to turn up or down.
Effective trading of post-gravity impulses relies on the
interaction between current price and your momentum
indicator. At new highs, prior support/resistance can't
be used to predict swings. Follow the MACD slope to flag
overbought conditions favorable for ranges or reversals.
Enter long positions when price falls but the slope
begins to rise. Or be conservative and wait for the zero
line to be crossed from below to above.
Patterns point to low risk momentum trades. Enter
retracements to a trendline or moving average and you'll
ride the dips just as new buyers jump in. Short sales
should be avoided completely when momentum is high
unless you're an experienced trader. Trying to pick tops
is a loser's game. Delay short sales until momentum
drops sharply but price is high within its range.
Pattern analysis can then locate favorable countertrends
with limited risk.
When a stock breaks to new highs, how long will the
rally last? In physics, a star that burns bright
extinguishes itself long before one emitting a cooler,
darker light. So it is with market rallies. Parabolic
moves cannot sustain themselves over the long haul.
Alternatively, stocks that struggle for each point of
gain eventually give up and roll over. So logic dictates
that the most durable path for uptrends lies somewhere
in-between these two extremes.
Overbought conditions lead to a decline in price
momentum and illustrate one ever-present danger when
trading new highs: stocks may stop rising at any moment
and enter extended sideways movement. Watch rallies
closely with your toolbox of technical indicators to
uncover any early warning signs for this range
The first break in a major trendline that follows a big
move flags the end of a rally and beginning of sideways
congestion. Exit momentum-based positions until
conditions once again favor rapid price change. In this
environment, consider countertrend swing trades if other
forces favor success. But stand aside once volatility
slowly dissipates and crowd participation fades.