Sunday, November 16, 2008

Cumulative New Highs/Lows and Stock Market Trends

One way to define a trend is a period in which more stocks are making new highs than new lows. I've taken new 20-day highs and lows across the NYSE, NASDAQ, and ASE going back to 2002 and created a cumulative line from the data. When the (pink) line is rising, we have a period in which new 20-day highs are outnumbering new 20-day lows. When the line is falling, new lows are dominating.

At times of transition, we see a handoff between new highs and lows. When the market made a momentum low in October of 2002 (top chart), the cumulative new high/low line also made a low. This was followed by a significant rally in which new highs meaningfully outnumbered new lows. When stocks retested their lows in March of 2003, the cumulative new high/low line did not confirm.

The reverse was the case at the 2007 market top. We saw new 20-day highs consistently outnumber new lows into the momentum peak at mid year (middle chart), then a topping and meaningful pullback of cumulative new highs/lows, followed by price highs in October that were not confirmed by the cumulative high/low line.

As we struggle to hold recent lows in the S&P 500 Index (bottom chart, blue line), the cumulative new high/low line continues to march to new lows. So far, we see no non-confirmations on the order of the two trend reversals illustrated above.