How to trade stocks that hit record highs

Each stage of the upward trend has unique factors that require strategic changes in risk management and profit goals. This is especially true when securities rise to new highs that have never been traded in their long history. This situation can quickly accumulate wealth, but requires special technical rules to use the mechanics of the game.

When securities reach uncharted territory, the momentum changes. The new highs show very favorable conditions. In this case, shareholders will not experience an oversupply situation, and they need to sell at a loss or make a profit. This unbalanced equation can be translated into quick gains that usually exceed logical price targets, but it can also produce unexpected behavior that encourages emotional decision-making.

When the securities hit a record high, the resistance will disappear, but the hidden obstacles still exist, ready to surprise the careless bulls through reversals and shocks. Although the breakthrough has completed the digestion of the previous supply, safety still requires additional testing that lasts several weeks or months. This process has the ability to trigger considerable losses and can be avoided by the first special rule, which associates upward trend positioning with breakouts.

Rule #1: Categorize the progress of the breakout

Breaking new highs is often carried out in three different stages. First, the price breaks through the resistance level and attracts above-average volume. This signifies “action” stage. The momentum of the rebound eventually faded, and the weaker players played near the rebound high. This imbalance will trigger the second or “reaction” phase, which will test the durability of the breakthrough. Support either stays the same, triggers a rebound above the previous high that confirmed the breakout, or rolls in a failed swing.Both results have completed the third or “resolved” phase.

Ambarella, Inc. (AMBA) broke through the resistance level of $36 in September and rebounded to a record high in the mid-term of $40. This phase of action gives way to the opposite reaction phase, which throws the price back to a new level of support and weakens it within two trading days, thus getting rid of the weak hand. Then, the security recovered all losses and set another round of record highs, completing the settlement phase.

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The accumulation/distribution measured by balanced volume (OBV) determines the path of least resistance. When it hits a new high, it is conducive to a fast upward solution, and when it lags behind price development, it is conducive to washing. This makes sense, because securities at historically high levels should arouse widespread interest, which translates into enthusiastic buying pressure. When it doesn’t, the trend needs to pause and find the lack of sponsorship or gravity can control to unlock the breakthrough.

During this testing phase, marginalized participants should avoid new long exposures unless they are within the extreme range of the risk/reward equation to their advantage. These opportunities usually come in the form of callbacks to new support. Those who have positioned themselves have no choice but to set a stop loss and let the market determine their fate.

Rule #2: Review the morphological structure during the breakout

Now classify the price structure that led to the breakthrough. Take defensive measures in the following situations: a) a breakthrough marks a third wave of rebound from a deep low in the previous range, or b) the price rises directly from a deep low to a breakthrough level, and there is no integration pattern established Move on under. Both of these scenarios increase the possibility that a rebound above the breakout level will exhaust the uptrend and produce a considerable correction.

A more bullish price structure will show an underlying pattern that is below the breakout level but not too deep within the previous trading range. Looking for these price bars to dig out round or square bottoms shows that multiple attempts to break through support have failed and reduce safety. This strong price movement establishes a strong support that is unlikely to break during the inevitable reaction phase.

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Rule #3: Find hidden resistance at new highs

Next, stretch the Fibonacci grid from the low point of the trading range to the breakout level, and mark the harmonic expansion at 1.270, 1.618, 2.000 and 2.618, as shown in the Mylan NV (MYL) chart. Then look for the first major high after the breakout to exceed 27% of the distance between the low and the breakout price, or 1.270 harmonics. A high point above this level will increase the chance of a successful breakthrough, while failure to reach this level will increase the chance of failure.

Higher harmonic levels will signify hidden resistance, as the uptrend gathers power and can be used to make a profit, unless the buy and hold strategy intends to maintain the position indefinitely. The highest expansion of 2.618 marks a lofty goal and can mark an important top, so at least consider re-evaluating the profit target when the position reaches that level.

Now connecting the previous highs of three or more points, represents an upward trend line that marks hidden structural barriers. If you find that trend lines contain uptrend progress in the past 6 to 12 months, stay vigilant because they expose weak momentum that could undermine the current rally. On the other hand, when an uptrend breaks through one of these lines, consider additional exposure, as it indicates escalating momentum.

Rule #4: Find your profit protection price

Let us assume that security has confirmed the breakthrough and cleared all hidden obstacles. The special rules are now transformed into a profit protection and enhancement mode. First set a minimum profit, if the upward trend reverses, the profit will be actively taken. You can use simple percentage gains (such as 10%, 20%, or 50%) or psychological levels (such as $5,000, $10,000, or $25,000) to determine this number. Technology-oriented market participants can establish a psychological stop that meets these goals, or simply choose an actual number.

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Avoid physical stops because the flash crash of May 2010 showed us that the predatory algorithms of the mobile modern market can target them at any time. There is no reason to waste all your hard work, make huge profits, and then lose it when chaos hits, as often happens. Just make sure that your magic number is completely unaffected by current price movements and will only be hit when the worst happens.

Rule #5: Consider additional exposure

Additional exposure can increase your profits to new highs, but buying at the wrong time will have the opposite effect and destroy your established profits. As a general rule, increase your position only when it falls into a favorable risk/reward position, such as selling to a weekly or monthly moving average, or when it clears new obstacles, such as a rising high trend line or Fibonacci Bonacci harmonics. These wide-ranging scenarios rarely happen, and usually only produce one or two favorable entry points in a year.

Bottom line

After finally getting rid of the gravity of the previous breakthrough level, securities at historical highs may exceed the logical price target. Apply special management rules to these upward trends, avoid them when prices rise to unknown territory, while ensuring that hidden pitfalls are avoided and core profits are protected.

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