A 52-Week High is a psychological level, support, resistance all in 1
Qualities and importance of 52-week high price level
Price action traders must look at 52-week highs because:
- They are very recognisable, very significant support and resistance levels.
- They are watched by analysts, professional traders and even reported by news-wires.
- They are easy to program, perfect for alert, filtering purposes.
52-week high as resistance support level
- 52-week highs are very easy to recognise because there can be only one each year.
- In an uptrend, a 52-week high is used as a conservative take-profit level for traders who have winning position.
- Bears who think that new highs are no longer possible use it as a best level to sell since its the highest price (to sell high buy low).
- The more times price visits the same level, the stronger resistance it becomes but the more likely there is a big move if it is penetrated.
- Breaking a 52-week high is considered a trending action and one expects it will continue with high probability.
- Former 52-week highs that have been penetrated become support because traders who failed to enter previously want to buy here whereas sellers who have made money on price retracement back to these levels want to exit their shorts.
In the above example using weekly chart of DAX30, we can see
- That 52-week highs are very easy to spot. On MT4, press CTRL-Y combination to turn on period separator. At the weekly chart, the period separator function places vertical lines at the end of each year and the start of the next one. The 52-week high is the highest traded price in between.
- At Point 1, Weeks 49 – 51 show price action reacting to 2011 high. This demonstrates its value as resistance. Conservative traders who bought DAX at any time before are likely taking profit here if they bet that the resistance will not be broken.
- At Point 2, we can see that DAX30 established a 52-week high in the last week of 2012. Come 2013, the former resistance of 2011 high became support. This happened again at Point 3.
- At Point 4, we see that price action continued to trend higher. Therefore, retracement also brought support higher to 2012 high i.e. the 52-week high of the previous year.
- Point 5 shows us a dramatic bull trap action of price making a new 2014 high but failing below its 2013 counterpart. As a resistance, the 2013 52-week high is the boss.
- For DAX30 to continue any uptrend movement, it has to systematically test and clear the former highs, both now serving their part as resistance.
Window to market psychology, good as alert
Since 52-week highs are very recognisable because there is only one every year, it is easy to look out for (note that levels can reprint for current year until the year is over but cannot reprint for past years). This quality makes it easy to spot, incorporate into trading. In fact it is also easy to program indicators or apps inside trading platforms or into other software to detect, filter equities at this level as well as to alert traders.
This screen grab from NASDAQ picks out stocks at 52-week high and its sibling 52-week low.
As a window to market psychology, 52-week high is easy to read. Here is a 4-point mantra:
- Stock, indices and forex pairs that are at 52-week high are strong (if they are weak, find them at low, not here).
- Since they are strong, expect them to continue to be strong (best time to ride the trend).
- Do not short 52-week high simply because your gut tells you to.
- Short only if you are convinced that there is a reversal chart pattern and/or price fails to penetrate after multiple tries. See post ‘Bearish Hang Seng Index loses 52-week high, meets multiple confluence‘.
52-week high phenomenon has a sibling called the 52-week low that explains the psychology of price weakness.
UPDATE 19 MARCH 2014 – USDHKD recoils at former 52-week high bonus chart
UPDATE 12 MAY 2014 – Straits Times Index turned by former levels
This chart of the Straits Times Index STI shows how former 52-week highs and lows continue to play a part as support resistance levels. Red arrow show former levels while orange labels show evidence of price action/reaction.
Strategies 52-week highs and lows:
- Sell test-restest showing resistance at former 52-week highs
- Fade bull traps i.e. failed upward-breakouts, followed by retest (resisted) of former 52-week highs
- Buy test retest showing support at former 52-week lows
- Fade bear traps i.e. failed downward-breakouts, followed by retest (supported) of former 52-week lows
Trend line breaks and failures were discussed in this story ‘Ttrend line break and its implications‘. Also discussed before, false breaks are phenomenon whose existence are taken for granted and it is valid to say that there little incentive to play a break out but every incentive to fade one.
For stock market traders and investors in Singapore, the good news is sharesinv.com provides information on 52-week highs and lows if you do not have a chart.
Lastly here is a chart of Yanlord (Singapore Exchange listed stock) showing ‘smoking guns’. Each rally into former 52-week highs were faded and turned out very effective trigger for sellers.