Wednesday, January 21, 2015

Tracking Market Cycles With Short-Term New Highs and Lows

Above are two charts from the excellent Index Indicators site that I find useful.  The top chart tracks the percentage of SPX stocks making fresh five-day highs.  The bottom chart tracks the percentage of SPX stocks making fresh five-day lows.

Typically we see five-day highs wane and five-day lows expand as market cycles top out.  We also have been seeing five-day lows crescendo ahead of cycle price lows.  

Yesterday, we closed modestly higher in SPX, but new lows expanded and new highs contracted.  Rob Hanna of the insightful Quantifiable Edges service recently issued a query study that noticed downside tendencies when the market rises but the proportion of rising stocks falls short of 40%.

Price action during the current market cycle has been somewhat distorted, but I'm viewing the current cycle as having begun with the mid-December lows, having peaked at the late December highs, and now in a down phase.  If that is the case, we should see at least one further down leg to the market that would take us below those December lows.  A dramatic expansion of new highs would contradict that scenario.  Tracking short-term strength/weakness via new highs/lows on a daily and several day basis is a useful way of determining if markets are strengthening or weakening going forward.

Further Reading:  A Look at Market Cycles