Do not buy after multiple days of Higher Highs 9/4/11

In my last blog I pointed out my resisting buying CREE after multiple days of rises as the stock is still in a downtrend. Since then CREE dropped about 8% and my hesitation looks justified. Still these opinions are based on averages and not a specific example. So I thought I would post an old article that had caught my eye about whether you would gain by buying a stock that had just made several days of higher highs. The answer is no. It is better to buy a stock that is in an uptrend on a dip. Here is the article...Keep in mind it is simply pointing out short term results over a week's time frame and not long term. The main point I want to make here is not to chase a stock that just made several days of higher highs. It is far better to buy a stock that has been in an uptrend that has just had several days of lower lows. And for me, I prefer to have the technicals pull these out and help me establish an exit criteria after I am in the trade, in case the trade goes wrong.
I am still cautious trying to catch a falling knife - so I prefer to make sure my system says a stock is in an uptrend before I look to buy it as it is falling. Contrarian traders do well buying after weakness; but that also takes a strong stomach in a major downtrend as weak can get weaker in a hurry.. be careful.

Higher Highs/ Lower Lows?                                                                 12/24/06

TradingMarkets Research article

“Higher Highs
We looked at stocks that made at least three consecutive days of higher highs, all the way to stocks that made at least seven consecutive days of higher highs. The results revealed a number of interesting findings, some of which are highlighted here:
- In all but one case, the average return of stocks that made "multiple days of higher highs" underperformed the benchmark.  
- In most cases the average returns of stocks that made "multiple days of higher highs" were negative, 1 day, 2 days and 1 week later.
- The results on average showed even greater weakness when we looked at stocks that made at least five consecutive days of higher highs.

In other words, on average, stocks that make "multiple days of higher highs" should not be bought.

"Lower Lows"
We looked at stocks that made at least three consecutive days of lower lows, all the way to stocks that made at least seven consecutive days of lower lows. Here's what we found:
- The average returns of stocks that made "multiple days of lower lows" were positive 1 day, 2 days and 1 week later.
- In every single case the average returns of stocks that made "multiple days of lower lows", outperfperformed the benchmark.
- The results were even stronger when we looked at stocks that had made 5 consecutive days of lower lows.
That means traders should look to build strategies around stocks that make at least five consecutive days of lower lows.
As you can see, on average, stocks that make at least five consecutive days of higher highs show a negative return over the next week (-0.20%). By comparison, stocks that make at least five consecutive days of lower lows show a positive return (+0.76%).
Once again, our research shows that both news and emotions lead investors to do the opposite of what they should be doing. They are buying when stocks make multiple higher highs and selling when they make multiple lower lows. In both cases, on average, this is will lead to negative returns. Much like my previous article on "Gaps and Laps", we found even greater opportunities by adding simple conditions, like stocks trading above or below the 200-day moving average, or combining multiple higher highs/lower lows with PowerRatings, etc.
Our research showed time and again, across almost every possible parameter, that the notion multiple higher highs are bullish, and multiple lower lows are bearish is incorrect. The statistics clearly show that, on average, it has been better to be a buyer of multiple lower lows, rather than multiple higher highs.
So, rephrasing the question asked at the beginning of this article, "Is it better to be a seller of stocks that have been strong and have made multiple days of higher highs? And, is it better to be a buyer of stocks that have been weak and have made multiple days of lower lows?" The answer (to both) is a resounding "yes".
Ashton Dorkins, Editor-in-Chief
* Our research looked at 7,050,517 trades since Jan 1, 1995. We applied a price and liquidity filter that required all stocks be priced above $5 and have a 100-day moving average of volume greater than 250,000 shares.