Short-term traders discover great rewards in uncharted
territory. Stocks at new highs generate unique momentum properties that ignite sharp price
moves. But these dynamic breakouts can also demonstrate very unexpected behavior. Old
battlegrounds of support/resistance disappear while few reference points remain to guide
entry and exit. In this volatile environment, risk escalates with each promising setup.
The final breakout to new highs completes a stock's
digestion of overhead supply. But the struggle for greater gains is far from over. Issues
reaching new highs often undergo additional testing and preparation before resuming their
dynamic uptrends. The chartist can follow this building process through the typical
pattern development expected during these events.
Price may return to test the top of prior resistance
several times. This can create a variety of stepping or basing ranges before the trend
finally moves sharply upward. Other times, stocks will immediately go vertical when new
highs are printed. The challenge for the trader is deciding which outcome is more likely.
Use accumulation-distribution analysis to predict whether
new highs will escalate immediately or just mark time. Price either leads or lags
accumulation. When stocks reach new highs without sufficient ownership and buying
pressure, they will often pause to allow these forces to catch up. Other times,
accumulation builds more strongly than price. The initial thrust to new highs confirms
this accumulation. The breakout triggers a new round of buying interest and price
immediately takes off with no basing phase.
On Balance Volume (OBV) and similar
accumulation-distribution indicators are essential tools for evaluating the strength of
new high breakouts. Expect an immediate upward thrust when OBV draws a pattern more
bullish than the price chart. Alternatively, when multiple accumulation-distribution
readings show ownership limping behind price, prepare for an extended basing period. But
always use caution with NASDAQ stocks. They double count each volume transaction, leading
to occasional false OBV readings.