Tuesday, February 25, 2020

All About Price: The 52-Week High/Low

This is part of my intermittent series on price, one of the most important and commonly encountered considerations in investing and trading. For this post, I will talk about one of the most used metric in determining a buy or sell call, the 52-Week High/Low (52WH/L).

I had used the 52WH/L as one of the indicators during my trading days. After I had identified a counter for trading, I would look at its 52WH/L price: if the current price was within the bottom 30% of the high/low range, then it was a buy opportunity. Similarly if the current price of my holding was within the top 30% of the high/low range, and if I was in-the-money, I would consider selling it.

Due to the emphasis of the 52WH/L by so many market participants, it had somewhat become an implicit resistance-support number in technical analysis terms, and the amount of trading volume will typically increase if the price approaches those two numbers.

Nevertheless, using the 52WH/L has its benefits and caveats. Let us have a look at some of them in a nutshell:

Some Benefits

#1 – Good for high price-to-book securities: Ever wanted to invest in a good company or REIT but it seems to be always on a high price-to-book ratio? Usually such securities are seldom near their book value, let alone being at it. The 52WH/L will give you, among other factors, an indicator to enter them at an appropriate price.

#2 – Applying multiple points of entry: If you are not comfortable at going in one shot on a new or existing share or REIT, you may apply a few price points along the 52WH/L. You can do it any way you want, like for example take the range between the high and low, and divide it into quartiles or quintiles, once per every week or month. Then you may contemplate going in once the price goes below a certain range, using a percentage of your deployable funds.

Some Caveats

#1 – Low can go lower: Investors and traders often overlook one of the main characteristics of price, which is if it is at a low, it can go lower. The 52-week is an arbitrary time period used in many investment and trading publications and websites, hence it formed some sort of a mental frame. Therefore it is suggested to look at the prices beyond 52 weeks, like maybe two or three years.

#2 – High can go higher: The opposite effect of caveat #1 can happen, too, regardless if there was a point in the past where a share/REIT price went higher than the current 52-week high, or it could be approaching an all-time high never seen before. Investors must look out for signs in the fundamentals (or for traders, momentum) that could point to a rise in price beyond the high limit, and then decide if the counter is to be kept or sold.

It is up to you whether to include the 52WH/L metric into your fundamental analysis. Past prices are not indicative of their future movements. Due diligence must still be practiced.

Check out the other posts in my All About Price series.

1 comment:

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