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


Plan your trades. Trade your plan said...

Assuming that there is a retest of the recent lows, a divergence between the new high/low line and price might be a good indication of a possible intermediate reversal. Would you agree with that ?

Angella said...

I love your book Enhancing Trading Performance and I will be watching the 20 day high/low very closely, please keep us updated. Thanks Doc!


a8703825 said...

Does "Cumulative New Highs and Los" mean:
+ You get one value from subtracting the new lows from the new highs of a day and
+ you add these values to the previous day`s value to get the Cumulative New High and Low - "value"?

Thank You!

Brett Steenbarger, Ph.D. said...


Yes, divergences when prices make new lows but where we see fewer stocks making fresh lows often offer opportunities for reversal.


Brett Steenbarger, Ph.D. said...

Hi Didi,

Yes, cumulative highs minus lows simply takes the difference between the two and adds to a cumulative total.