Saturday, January 26, 2008

Gauging Market Strength With Cumulative New Highs and Lows

I typically follow the number of stocks making fresh 20-day highs and lows across the NYSE, NASDAQ, and ASE. This is an excellent way of detecting day-to-day strengthening or weakening in the broad market.

At a longer time frame, however, it's instructive to examine the cumulative line of new highs minus new lows. Above we see the cumulative high-low line plotted against the S&P 500 Index (SPY). Note that new highs topped out in early June, 2007, well ahead of the market index.

Similarly, we can look for an upturn in the cumulative high-low line to confirm a bottoming process in stocks. Thus far, we've seen two consecutive days in which new 20-day highs have outnumbered new lows: on Thursday (649 vs. 401) and on Friday (663 vs. 364). This week I'll be looking for evidence of continued expansion in new highs vs. a resumption of the expansion in the number of new lows to gauge the likelihood of retesting this past week's lows.


New Highs and Short-Term Market Returns