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This article was written for Stocks, but the same trading concept applies to Commodities. :-)

New Highs: New Price Highs Mean New Opportunities

"Cheap stocks are cheap for a reason."
-- William J. O'Neil, Chairman & Founder of Investor's.com

Trading Tip: Many of the strongest stocks begin their major ascent after trading at new highs, while stocks making new lows usually go even lower.

Buy High, Sell Higher
How many times have you heard the phrase, "buy low, sell high"? This is the conventional wisdom in the investment world, but research shows you shouldn't be concerned with that part about buying low. Let's walk through this one step at a time. Research shows that the best-performing stocks make new highs before they make their major leaps in price. Moreover, stocks at new highs tend to continue moving higher, while stocks making new lows tend to continue to move even lower.

This is a concept many investors find difficult to accept. They assume it's too late to buy a stock that's reached an all-time high. But the great paradox of the stock market, as Investor's Business Daily Founder William O'Neil calls it, is "What seems too high and risky to most investors is likely to continue rising. And what seems low and cheap usually goes down."

Think about it. If a stock goes from $15 to $50 it has to reach new highs at $16, $17, $18 and so on. Stocks making new lows, on the other hand, manifest inherent weaknesses.

Just by applying the laws of supply and demand you can see why new highs are important. When stocks advance, they're demonstrating growing demand as investors raise their expectations about the company. On the other hand, stocks making new lows are usually afflicted by just the opposite: sagging expectations. Yes, there's plenty of stocks in the bargain basement, but they're there because the merchandise, so to speak, isn't hot.

Some stocks may have very strong fundamentals or great stories, yet they don't go up because there's little investor interest. So while you wait for a stock to be discovered -- if it ever does -- other stocks are moving into the spotlight. The spotlight, in a way, is the new-highs list, such as the one that appears daily in IBD and is explained later.

Stocks reaching new highs tell you professional investors are moving in and pushing prices higher.

Often, The Best Is Yet To Come
Would you shy away from stocks that more than doubled in the past year or less? Consider what happened with these stocks:

From the start of 1999 to August 1999, Qualcomm surged more than 500%, to $39. But the stock didn't let up, finishing the year at $176 -- a gain of 351% since August.

Jabil Circuit had grown from $11 to $27 in about nine months ending in May 1997, when it surged another 189% over the next five months.

In a good market, opportunities such as these, which start with new price highs, will surface every two or three weeks. In fact, if you ignore this simple rule, you would miss out on just about every major winning stock.

However, there can be such a thing as an "overextended" stock: one that truly has gone up too much, too fast and is likely headed down. As a rule, don't buy any stock that has risen more than 5% past its buy point. In a nutshell, the buy point is the price after a stock clears the highest point in its basing formation. Basing formations are periods of price consolidation when a stock moves more or less sideways for a number of weeks after earlier advances. The buy point and basing formations are explained in the stock charts lesson.

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