New Highs – New Lows–A Double your Pleasure Post (from facesincabs + Jack Damn)

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Editor's note.  We have two great selections from guest posters on the NHNL's.  I've elected to put them together to facilitate discussion and for you to see a comparison/contrast of two contributors' use.  I did not ask permission first, so if there is a problem with this approach, I beg forgiveness!

Nhnl copy


Facesincabs

 

OK
kids … I still see quite a bit of questioning about the prospects for this
market decline or pull back … so here is an indicator that the big money keeps an eye on
… New Highs / New Lows …

 

Longer
Term Snapshot – http://tinyurl.com/y4jnurn
(a link to my live chart)

$nyhl_1

 

Shorter
Term Snapshot – http://tinyurl.com/yys938d
(a link to my live chart)

 

 

$nhl2


Please
note that a move below the Zero line would a “first” since the rally began in
March 2009.  Looks like a BIG deal to me,
and we are nearly there.  The power spike
and shock event on Friday was a big part of getting there.





Jackdamn The New Highs-New Lows Index ($NYHL – StockCharts.com) is probably one of the best indicators to test the underlying breath of current market conditions. Not only is it a great technical indicator, but it can tip you off the a change in fundamental herd psychology. For this post, I'll focus on the NYSE Composite Index ($NYA – StockCharts.com) as my market to measure.

New Highs-New Lows Index ($NYHL)
The New Highs-New Lows Index ($NYHL) measures the number of stocks that have reached new highs or lows for the year on any given day. Why is this important? As a bull or bear trend expands, so should the bullish or bearish psychological stance of the majority of market participants. If traders think the bull trend is likely to continue, they'll buy anything that's cheap and push them higher beyond previous highs. If they think the bear trend likely to continue, they'll hammer stocks down in waves until they're pulp.

Obvious stuff, right? So how can we get in for the next bear run just as people potentially begin to shift their fundamental market belief? Setting aside the fact that the SEC just kicked Goldman in the Sachs causing a bit of a sell off last Friday, let's look at the breath of the run off the March 2009 lows using the $NYHL.

High_low_01


Esteemed speculator and author Dr. Alexander Elder is a big proponent of the New Highs-New Lows index. From his classic book, Trading For A Living, here are three things we should look for in the $NYHL:

"Traders need to pay attention to three aspects of the $NYHL, listed here in the order of their importance: divergences between the peaks and the bottoms of $NYHL and prices, the trend of $NYHL, and the level of $NYHL above or below its center-line."

Looking at the chart above we can see the $NYHL is clearly in a strong uptrend as it has matched almost all the new highs in price on the $NYA with expanding new highs of its own. There is no divergence between the two. How does this help us a bear traders?

Before we answer that, let's pull out on the chart and look at a bigger picture of the $NYHL vs. the $NYA.

High_low_02

 I flipped it with the $NYHL on top and the $NYA on bottom. The chart is a bit messy, but what it shows is the two recent major market turns (2007 top & 2009 bottom) and the divergence between price and the $NYHL. If you look today's market conditions (yellow box in the upper right corner), we don't have that kind of divergence yet.

So longer term, as bear traders, we might not be able to say that right now, the majority of market participants are bailing on expensive stocks (insane as they may be). According to Elder, we'll need price to move higher, but the $NYHL to shrink if we're to see a potential topping pattern.