Buy High, Sell Higher
How many times have you heard the phrase, "buy low, sell high"? This is the conventional wisdom in the investment world, but research shows you shouldn't be concerned with that part about buying low. Let's walk through this one step at a time. Research shows that the best-performing stocks make new highs before they make their major leaps in price. Moreover, stocks at new highs tend to continue moving higher, while stocks making new lows tend to continue to move even lower.
This is a concept many investors find difficult to accept. They assume it's too late to buy a stock that's reached an all-time high. But the great paradox of the stock market, as Investor's Business Daily Founder William O'Neil calls it, is "What seems too high and risky to most investors is likely to continue rising. And what seems low and cheap usually goes down."
Think about it. If a stock goes from $15 to $50 it has to reach new highs at $16, $17, $18 and so on. Stocks making new lows, on the other hand, manifest inherent weaknesses.
Just by applying the laws of supply and demand you can see why new highs are important. When stocks advance, they're demonstrating growing demand as investors raise their expectations about the company. On the other hand, stocks making new lows are usually afflicted by just the opposite: sagging expectations. Yes, there's plenty of stocks in the bargain basement, but they're there because the merchandise, so to speak, isn't hot.
Some stocks may have very strong fundamentals or great stories, yet they don't go up because there's little investor interest. So while you wait for a stock to be discovered -- if it ever does -- other stocks are moving into the spotlight. The spotlight, in a way, is the new-highs list, such as the one that appears daily in IBD and is explained later.
Stocks reaching new highs tell you professional investors are moving in and pushing prices higher
2007-01-15
03:22:04
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4 answers
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asked by
joshua c
1
in
Business & Finance
➔ Investing