Trend Following Trading Using 52 Week Highs and 52 Week Lows

When I first became interested in making money in the stock market, my initial strategy was to seek out stocks making new 52 week lows, as I felt that stocks doing so would be poised for a big rebound.   Today, fourteen years later, I find myself doing the exact opposite.

It is completely counter-intuitive to a novice trader, but buying new 52 week highs and short selling new 52 week lows can be very profitable.

One challenge I have experienced recently is that there are fewer and fewer stocks making new 52 week highs.  Although the Dow and the S&P 500 are still on mechanical uptrend signals for me, beneath the surface there are thousands of smaller cap stocks that have broken down badly.  This can be illustrated in the following chart:

The chart above shows the tech laden QQQ divided by the mega cap dominated DIA.   In my opinion, the strength in the Dow is masking a great deal of weakness occurring under the surface.

Although the Nasdaq has been weak, I am not interested in shorting at this point.  The long term trend of QQQ remains up, and the index has yet to form a new 52 week low. Just as I only buy assets making new 52 week highs, I am also only interested in shorting new 52 week lows.

Amazingly, during the years 2009, 2010, 2011, 2012, 2013, and 2014 the number of new 52 lows printed by QQQ has been exactly zero which, to me, means zero short signals:

The bottom line is that I a not highly motivated to buy stocks nor short sell stocks at this time.

There are, however, many other opportunities besides stocks.   Given that there are perhaps over 1,000 different ETFs, there will always be a bull market somewhere.

As an example of this, take this agriculture ETF:

Notice, for the first time in 3 years, new 52 week highs are being formed.   This is bullish action and I currently have a position.

Another agriculture fund, DBA, is acting similarly:

Another asset class which is making new 52 highs almost daily is preferred shares:

Preferred shares have held up very well during this most recent sell-off and have been paying me an attractive monthly dividend while I wait for other opportunities to emerge.

Likewise, utilities have been one of the strongest sectors and have recently been making new highs as well:

One of the advantages of trend following is the willingness to go both long and short.  So, just as new 52 week highs are bullish, a trend follower should also seek to short sell new 52 week lows.   One asset class that is approaching new lows is Silver:

Silver is down about 62% from the top, and has made many new 52 week lows to get to this point, yet zero 52 week highs have formed since then.