New High New Low Indicator
A measurement of market breadth
This technical indicator measures the count of which securities trading on the New York Stock Exchange have achieved new 52-week highs, and which securities (of approximately 3,000 stocks, preferred stocks, closed end funds and ETF's) are trading at new 52-week lows.
If a large number of securities are reaching high points in their pricing history we can assume that market advances are broad-based, that is, many issues are participating in the strength of the markets.
If the number of issues making new highs diminishes, while a particular index rises to a new peaks, then we recognize that fewer and fewer stocks are participating in the rise. (This is referred to as a “negative new highs divergence”), often a sign of impending, but not necessarily immediate, decline.)
On the other hand, if a major market index were to decline to new lows, but fewer and fewer securities on the NYSE fall to their new 52-week lows, then a “positive new lows divergence” may be in place i.e. fewer stocks are participating in market declines. This is usually an indication of a forthcoming upside reversal.
Weekly Analysis of New Highs versus New Lows
Barrons, the weekly Dow Jones Business and Financial Weekly, and other financial publications report the number of NYSE securities (issues) at New Highs and New Lows as of the closing price each week.
As a general rule, the market climate can be considered positive if readings are heavily skewed on the upside – for example, 300 new highs versus 30 new lows.
As a general rule, the market climate is is bearish if the numbers of new highs and new lows are about even, and especially so when both are high as well as about even (which indiates a churning, split market).
If the lesser of new highs or new lows comes to more than 7% of the total number of issues traded on the NYSE, then a split and bearish condition may be presumed. Such a signal doesn't necessarily result in market declines but should be taken as a warning.
Daily Analysis - How to Utilize the "New High New Low Ratio"
- Compute the ratio of daily new highs divided by the sum of daily new highs + daily new lows (for example, if there are 70 new highs on a given day and 30 new
lows, the calculation would be 70/(70+30) or 70%).
- Now calculate a 10-day average of these daily ratios
- To apply the ratio, observe these trading rules:
Good BUY SIGNALS occur when the 10-day ratio declines to below 30% and then turns up. (Note: If the
ratio has fallen to below 15%, do not buy until it rises to above 15%.)
READINGS ABOVE 90% indicate very strong market breadth, which is very bullish.
SELL SIGNALS occur when the indicator falls from above 90% to below 80%.
By and large, you can safely hold positions when the 10-day ratio of new highs/new lows + new lows remains above 80%. From time to time, there will be some market decline (obviously) during the period that the indicator declines to and below the 80% line, but by following this rule, you will be able to remain in the stock market throughout many advances of long duration, rather than being whipped in and out by short-term declines.
The status of daily and weekly new high – new low data is reported on the twice-weekly Systems &
Forecasts Market Update, as well as in each issue of the newsletter.
Gerald Appel is President of Signalert Corporation and author of more than 10 books on investing. Please read our disclaimer.