What to Do With Stocks That Hit All-Time Highs about:reader?url=https://www.investopedia.com/articles/active-trading/0...

investopedia.com

What to Do With Stocks That Hit All-

Time Highs
By Alan Farley
7-9 minutes

Each phase of an uptrend has unique factors that need strategic

shifts in risk management and profit objectives. This is especially
true when a security rallies to a new high that hasn't been traded in
its long-term history. This scenario can build wealth quickly but
requires special technical rules to capitalize on the mechanics in
play. (For related reading, see: Five Minute Investing: Stock
Picking.)

Momentum dynamics shift when a security reaches uncharted

territory. The new high print signals very favorable conditions in
which there's no oversupply in the form of shareholders who need to
sell at a loss or to get even. This lopsided equation can translate into
rapid gains that often exceed logical price targets but can also
generate unexpected behavior that encourages emotional decision-
making. (See also: Avoid These Common Investing Psychology
Traps.)

Resistance disappears when a security hits an all-time high but

hidden obstacles remain, ready to surprise unwary longs with
reversals and shakeouts. While the breakout completes the
digestion of prior supply, the security undergoes additional testing

1 of 6 6/23/2020, 11:22 AM
What to Do With Stocks That Hit All-Time Highs about:reader?url=https://www.investopedia.com/articles/active-trading/0...

that can last weeks or months. This process has the power to trigger
sizable losses that can be avoided with the first special rule, which
categorizes the uptrend positioning in relation to the breakout.

Rule #1: Categorize the Breakout's Progress

Breakouts to new highs tend to unfold in three distinct phases. First,

price thrusts above resistance, attracting higher-than-average
volume. This marks the "action" phase. Rally momentum eventually
fades, with weak hands getting on board near the rally highs. This
imbalance triggers the second or "reaction" phase, which tests the
durability of the breakout. Support either holds, triggering a rally
above the prior high that confirms the breakout, or it rolls over in a
failure swing. Both outcomes complete the third or "resolution"
phase.

Ambarella, Inc. (AMBA) broke out above resistance at $36 in

September and rallied to an all-time high in the mid-$40s. This
action phase gave way to a contrary reaction phase that dumped the
price back to new support and undercut it for two sessions, shaking
out weak hands. The security then recovered all of its losses and
posted another round of all-time highs, completing the resolution
phase.

Accumulation/distribution as measured by on-balance volume

(OBV) determines the path of least resistance, favoring rapid upside
resolution when it hits new highs and whipsaws when it lags price
development. This makes sense because a security at an all-time
high should generate widespread interest that translates into
enthusiastic buying pressure. When it doesn't, the trend needs to
pause and find missing sponsorship or gravity can take control,

2 of 6 6/23/2020, 11:22 AM
What to Do With Stocks That Hit All-Time Highs about:reader?url=https://www.investopedia.com/articles/active-trading/0...

unraveling the breakout. (For more, read: Uncover Market

Sentiment With On-Balance Volume.)

Sidelined participants should avoid new long exposure during this

testing phase, except at the range extremes where the risk/reward
equation will work in their favor. These opportunities typically
present themselves in the form of pullbacks to new support. Those
already positioned have little choice but to set stops and let the
market decide their fate.

Rule #2: Review Pattern Structure Into the Breakout

Now categorize price structure leading into the breakout. Take

defensive measures when a) the breakout marks the third rally wave
off a deep low within the prior range or b) price runs straight up into
the breakout level from a deep low and keeps on going without
building a consolidation pattern. Both scenarios raise odds that the
rally wave above the breakout level will exhaust the uptrend and
yield a sizable correction.

A more bullish price structure will show a basing pattern below the
breakout level but not too deep in the prior trading range. Look for
these price bars to carve out rounded or square bottoms that show
several failed attempts to a break support and send the security
lower. This sturdy price action builds strong support that's unlikely to
break during the inevitable reaction phase.

Rule #3: Locate Hidden Resistance Levels at New

Highs

Next, stretch a Fibonacci grid from the low of the trading range to the
breakout level, and mark out harmonic extensions at 1.270, 1.618,

3 of 6 6/23/2020, 11:22 AM
What to Do With Stocks That Hit All-Time Highs about:reader?url=https://www.investopedia.com/articles/active-trading/0...

2.000 and 2.618, as illustrated on the Mylan N.V. (MYL) chart. Then
look for the first major high after the breakout to exceed 27% of the
distance between the low and breakout price, or the 1.270 harmonic.
A high exceeding that level raises the odds that the breakout will
succeed, while failing to reach that level raises the odds for failure.
(For more information on grid placement, see: Placing Fibonacci
Grids Is Key to Your Trading Strategy.)

Higher harmonic levels will mark hidden resistance as the uptrend

gathers force and can be used to take profits, unless a buy-and-hold
strategy intends to keep the position indefinitely. The highest
extension at 2.618 marks a lofty goal that can signal a significant
top, so at least consider re-evaluating profit goals when a position
reaches that level.

Now connect prior highs that line up in three or more points,

denoting rising highs trendlines that mark hidden structural barriers.
Be wary if you find trendlines that have contained uptrend progress
for the past six to 12 months because they expose weak momentum
that could undermine the current rally. On the flipside, consider
additional exposure when the uptrend thrusts above one of these
lines because it indicates escalating momentum. (See: The Utility of
Trendlines.)

Rule #4: Find Your Profit Protection Price

Let's assume that the security has confirmed the breakout and
cleared all hidden barriers. Special rules now shift into profit
protection and enhancement mode. Start by setting a minimum
profit that will be taken aggressively if the uptrend reverses. You can
establish this number using a simple percentage gain like 10%,

4 of 6 6/23/2020, 11:22 AM
What to Do With Stocks That Hit All-Time Highs about:reader?url=https://www.investopedia.com/articles/active-trading/0...

20% or 50%, or a psychological level like $5000, $10000 or

$25000. Technical-oriented market players can establish a mental
stop that meets these objectives or just choose an actual number.

Avoid physical stops because the May 2010 flash crash showed us
they can be targeted at any time by the predatory algorithms that
move modern markets. There's no reason to let all your hard work
go to waste, building a big profit and then losing it when the chaos
hits the ticker tape, as it does on a regular basis. Just make sure
your magic number is well out of the way of current price action and
will get hit only if the worst-case scenario plays out. (For more,
see: Three Types of Profit Protection Stops.)

Rule #5: Consider Additional Exposure

Additional exposure can supercharge your profit at a new high, but

buying at the wrong time will have the opposite effect, destroying the
profit you've already built. As a general rule, only add to the position
when it falls into an advantageous risk/reward location, like a sell-off
into a weekly or monthly moving average, or when it clears a fresh
barrier like a rising highs trendline or Fibonacci harmonic. These
broad-based scenarios will occur infrequently, often yielding just one
or two favorable entry points over the course of a year.

The Bottom Line

A security at an all-time high can exceed logical price targets after it

finally escapes gravity at the prior breakout level. Apply special
management rules to these uptrends, getting out of the way as price
lifts into uncharted territory while ensuring that hidden traps are
avoided and the core profit is protected. (For additional reading,

5 of 6 6/23/2020, 11:22 AM
What to Do With Stocks That Hit All-Time Highs about:reader?url=https://www.investopedia.com/articles/active-trading/0...

check out: Risk Management Techniques for Active Traders.)

6 of 6 6/23/2020, 11:22 AM