Saturday, August 15, 2009

Short-Term New Highs and Lows: A Valuable Market Timing Tool

Here we see five-day highs (red line) and five-day lows (yellow line) for the basket of 40 stocks that I track regularly via the blog. The basket consists of five highly weighted issues across the eight S&P 500 sectors that I follow weekly; for a listing of the 40 issues, check out this post.

The computation of new highs and lows uses daily high and low prices, so these are not necessarily *closing* five-day highs and lows.

What we see is that the new highs/lows tend to shift ahead of important short-term trend changes in the S&P 500 Index (SPY; blue line). Note, for example, how five-day lows dried up at the July bottom; how new highs have peaked in the current market and now are being overtaken by new lows.

Reversals, in which a plurality of new highs is replaced by a plurality of new lows and vice versa, are significant in terms of short-term trend shifts. I am currently watching closely the reversal pattern that appears to be under way at present.

In a longer-term market uptrend, spikes of new lows will occur at successively higher prices and make worthwhile points to consider for entry on swing trades, particularly when those new lows begin drying up. Similarly, in longer-term downtrends, spikes in new five-day highs will often make good entry points for short sales.

Breaking out the new highs/lows by sector also is quite helpful in identifying shifts in strength due to sector rotation.

I will be posting these data regularly as part of a continued expansion of decision support tools. Eventually, I will also post intraday new highs/lows, which are unusually helpful in identifying directional shifts/transitions that occur within the trading day.