I have never practised playing the reversal from 52 week lows on a regular basis. I usually go for 52 week highs, or 2-3-4 or multi year high breakouts.
While playing these breakouts, the most important aspect to consider is the kind of consolidation that the stock has undergone before or around the breakout levels. If that is the case there are higher chances of success. E.g A stock that has formed a flag or a rectangular consolidation, triangle, rounding structure etc below or near breakout levels, has a higher success rate .
Coming to 52 week low strategy, I think these stocks qualify for the weakest stocks. The conventional wisdom is that during market correction, the weakest stocks tend to fall the most. Usually these stocks are at 52 weeks low in a strong bull market for a reason. These companies and sector often tend to suffer from strong headwinds. And we are not too sure when things are going to turn for the better.
Whereas in case of stocks breaking out from 52 W or multiyear high, there is a lot in terms of fundamentals going for them. Otherwise it is rare to see stocks going in for these kind of breakouts. And when you get into these kind of stocks you are going with the trend. And trend is your friend.
Mentally it is difficult to buy a stock after it has rallied to hit one year or multi year highs. So actually very few investors are able to buy these kind of breakout stocks. The folks playing breakouts as per my experience are a minority in the market. Playing breakouts requires discipline. It’s not prudent to chase prices too far beyond breakout point. And stop losses have to be followed strictly. And even in same stock if the trend reverses after getting stopped out, hopping on again should not be a problem, mindset wise.
In my experience the best investment case are those stocks which are at 52 week high or multiyear highs and still appear cheap/reasonably priced on conventional valuation parameters.
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