moving average (10-day EMA) or a 3 ATR. (14 day period)
- Buy a new all-time high and trail your stop with an ascending
moving average (10-day EMA) or a 3 ATR. (14 day period)
Why is buying into, and holding onto all-time highs, good trading?
The more times a support or resistance level is touched by price,
the stronger
that level becomes. Most traders deal in range bound securities because they
think they know that a stock’s price is unlikely to exceed a strong resistance
level. The more traders that recognize this principle, the more short sellers there
are lined up to short a key resistance level like a 52-week
high or an all-time
high. And the more short sellers there are, the more buy stops there will be at an
unlikely level, just beyond resistance by momentum traders, breakout traders,
and some trend followers.
For example, if the SPY has approached the same
all-time high on several
occasions, profit taking has become exhausted, and investor sentiment is more
positive due to central bank support of the equity markets, media induced fear
has probably caused everyone that wanted to sell to already be out.
This causes:
-
Demand for stocks to go up, as selling pressure dissipates and the remaining
investors are just holding.
- All-time highs to be breached and, short sellers to be squeezed out as they are
stopped out and forced to buy back to cover their short positions. This creates
what
we affectionately term a short squeeze. Everyone who thought they knew
where the ceiling (resistance) was, no longer holds a position in that index. What
once was the ceiling becomes the new floor, or support level.
Once a security breaks out above strong resistance, it takes some time to create
and recognize the new ceiling. Short sellers become less
likely to step in because
they can no longer anticipate where the stock is likely to find resistance and
reverse. The term
blue-sky breakout is used to describe a stock that breaks above
all previous resistance points.
At all-time highs, there is no resistance, no stop
losses being triggered, and only profit taking. There is a temporary relief of
selling pressure because current holders are profitable.
Price moves higher until
profit targets are reached and profit taking begins again.
