Avoiding Pitfalls

Like you've seen in earlier chapters, you don't want to buy a stock on any single factor. Where a stock is in relation to its 52-week high and low price is just one part of your stock-selection checklist. Other important ingredients are the Earnings Per Share (EPS) Rating, the Relative Price Strength (RS) Rating, the Industry Group Relative Strength (Group RS), and so on. These concepts are explained in the lessons on earnings, leaders and industry groups.

Also, be careful with stocks that make new highs on less and less trading volume. This could be a sign of a stock topping (reaching its peak), especially in cases when a stock has gone up at least 50% in a few weeks after an extended advance. When a stock goes up on low volume, it's a gain produced by relatively small purchases. It's much safer to go with a stock that makes a new price high on higher volume, which indicates broader support for the stock.