The new high/new low ratio (NH-NL) has been around for many years, but different investors use this indicator in different ways. Some investors plot the relationship on a chart using the number zero as a neutral designation with positive numbers equaling more new highs than new lows and a negative number equaling more new lows than new highs based on a specific time period. I developed and used the NH-NL relationship in a completely different way than some of the more popular methods. I started following stocks reaching new highs while reading Investor’s Business Daily many years ago. I did not use the news highs as an indicator, but only looked at stocks to buy from the list. As I became a more experienced trader, I subconsciously began to gauge the market while watching to see if the new highs were rising or falling. After the stock market bubble burst in 2000, I started tracking the difference between new daily highs and new daily lows. I would enter them into an Excel sheet along with the price and volume of the major market indices and study their relationship. Within two years, he was convinced that the major market highs and lows could be easily located by aggressively studying the price and volume of the major indices and studying the ups and downs of the NH-NL ratio. Broad market indices often give investors false moves in all directions and many market and investor services have developed new indicators to help assess the market to try and identify turning points without much success. Many of these secondary indicators succeed in showing the investor whether the market is weak or strong, but fail to identify the strength or weakness of a turning point with great accuracy. Many of these secondary indicators give false signals along with general market indices.
With several years of serious study under my belt using my NH-NL ratio method, I have accurately hedged my money during downturns and accurately guided my purchases when the market reversed and began a new sustained uptrend (not a head). fake).
How do I use my NH-NL ratio?
I start by recording the new daily highs and lows from Investors Business Daily (my preference), but you can use any free or paid service on the web. Over the past five years, I have developed key levels that the market must reach or violate to trigger certain actions. I’m not pulling any of these numbers out of thin air, as they are all based on actual experience and not derived from back testing. For a market to convince me that it is following and starting a new uptrend, it must consistently present me with a minimum of 500 new highs per day. When it’s a weekend, I add up the weekly NH-NL totals and divide by the number of active trading days to get the weekly average. The average must have a minimum of 500 shares per day to consider risking more than 50% of my cash on new positions (the new leaders). Once the weekly averages hit 800-1,000+ shares per day, we know the market is in full swing and you can start committing all of your trading and using margin. In 2003, the market gave numerous instances where new highs topped 1,000-1,200 shares per day, a very impressive number. When the market shows strength like this, the trend has become obvious and you should have your money working for you by following the trend. Keep in mind that 75% of all listed stocks will follow the general market trend.
Recently, in September and October 2005, the NH-NL ratio has been negative, which means that we are seeing more new lows than new highs. When this type of action occurs, you need to lock in profits and move your cash to margin. It is not safe to invest on the long side of the market when the relationship is negative. Many times, a bear market can form when the relationship weakens and turns negative. If the market confirms a bear market or downtrend, it may be an opportune time to make money by shorting stocks or using advanced strategies with options (I only recommend this for advanced and experienced traders). You need to determine if the market is in a downtrend or if it is trading sideways. If you are trading sideways, it will be best to withdraw your cash on the sidelines and wait for a direction to form (either up or down). This article was written and published on October 25, 2005, the first day after the NH-NL relationship turned positive after 13 consecutive days of negative relationship. The last two weeks have averaged negative rates with some days only reaching 15 new high quality stocks. This type of weak action could signal a bottom in the market as we prepare to form a new rally. The most crucial indicator to watch over the next few weeks will be the NH-NL ratio to see if it can continue to gain strength and push new highs to 500+ shares per day. If this happens, it will confirm the current indication that a rally has formed in the major indices and you can start committing more than 50% of your trading to new leaders breaking solid foundations or stocks moving higher from areas of established support.
When I look back at my archived IBD printouts, I can see the strength and weakness this relationship gave us throughout 2002 and 2003. I remember how the relationship went from negative territory in September 2002 to a positive relationship. in October 2002. After reaching positive territory, the new high index rose to the 800-1,100 range in the first six months of 2003 when we were in a strong bull market, the strongest year since the bubble burst. I don’t know what’s in store for investors next month or next year, but you can get a good idea by following this indicator as it turns on the positive side after a very poor October (2005). I wrote about the Halloween indicator once and am now convinced that there is some validity to it, especially if this NH-NL relationship confirms another rally as October comes to an end.