Breaking the market stereotype: Why you should be buying into new highs  

“What seems too high in price and risky to the majority usually goes higher, and what seems low and cheap usually goes lower.” – William J. O’Neil, MarketSmith Founder

The ‘N’ in the CAN SLIM strategy stands for either a ‘New Product,’ ‘New Management,’ ‘New High,’ or any other new factor, which could positively change the operating environment for the stock and ultimately drive its price into newer realms.

We would like to especially draw your attention to buying into new highs. Buying a stock when it is scaling new highs might seem strange and scary to many investors.

About 98% of individual investors would never buy a stock that makes new highs. Buying a quality stock at a new high is buying into the emerging strength with a belief that it could prove to be the beginning of the next big move.

Rather than buying every stock that makes a new high, make sure that the stock breaks out of a sound base pattern before it sails above the pivot, on a volume at least 40% higher than the average. Investing when the stock price is way too extended, say 5–7% or higher from its pivot is not ideal as well.

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Mayuresh Joshi

Head of Research – Equity|William O’Neil India

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Traditionally, investors often believe that they are value investing when they prefer to shop stocks near their 52-week lows. The idea of buying from a discount sale in a supermarket rarely applies while buying stocks. Stocks on the new-high list tend to go higher in price, while those on the new-low list tend to go lower. Good quality products are always expensive, so are the good quality stocks.

Let’s take an example to illustrate the fact:

Infosys, a leading IT firm made a new high on September 16. Many retail investors would have booked out of it thinking how high it can go. Conversely, we initiated a fresh long position on September 16. Accordingly, the stock continued its momentum and made new highs consistently. Currently, we are at a gain of over 24% in the scrip

Disclaimer: The views and investment tips expressed by experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.