Wednesday, March 25, 2009

Stock Market New Highs and New Lows: Modifying the Standard Indicator

My recent post focused on a revised advance-decline indicator with interesting intraday applications. If you click on the above chart, you'll see another modified indicator: below each day's bar for March's S&P 500 Index (SPY), you'll see the number of stocks across all major indexes that made fresh 20-day highs (top number) and the number that made fresh 20-day lows (bottom number). Major props to the excellent Barchart site for these data.

Notice that, as we bottomed in the early portion of the month, the number of stocks registering fresh 20-day lows leveled out, with new lows peaking ahead of price. This is not an unusual pattern. As a market tops or bottoms, leading sectors begin to make their reverse moves, so that fewer stocks are making new highs at price peaks and fewer issues are registering new lows at price bottoms.

Also observe that, during this rally, new 20-day highs have expanded smartly. This tells us that a trend is intact: an increasing number of stocks are participating in the rally. As long as new highs or new lows are expanding, we can view pullbacks in new highs or lows as potential points to enter the trend on a swing basis (given that price is likely to top or bottom thereafter).

What is not often appreciated is that the new high/low data also have implications for intraday traders. Take yesterday's market (please). When we touched the previous day's high, as noted in my Twitter comment, only 1593 issues at that time had made new 20-day highs, down from over 2600 the day previous. This was an indication that the broad market was *not* gaining strength and that we were not likely to break out to the upside. Knowing whether new highs or lows are expanding can be quite helpful in gauging whether or not a possible breakout move is likely to turn into a trend.

The advantage of tracking 20-day highs and lows is that the data are much more sensitive than the standard 52-week new highs/lows typically quoted by news services. After a bear market such as we've had and the subsequent healthy rally, relatively few issues are making fresh 52 week highs *or* lows. By tracking new highs and lows for the past month, we can detect shorter-term shifts in market strength and weakness.

So let's add new highs/lows to the emerging daytrader analyst effort on Twitter. At key market junctures (when I'm at the screen and not working with traders), I will update the intraday status of new 20-day highs and lows. Let's see if that proves helpful for decision support. As always, subscription to the Twitter posts is free via RSS feed, or you can keep up with the last five tweets on the blog page.