Section 10:
New High/Low Index
The new high and new low index measures the number of stocks making new 52-week highs and 52-week lows. The index is calculated by subtracting new lows from new highs. The index is bullish if the reading is above zero and positive. The index is bearish if the index is below zero and negative.
A positive reading reflects that there are more stocks making new highs than stocks making new lows. Negative readings reflect that there are more stocks making new lows than stocks making new highs.
The index is rather erratic from one day to the next, so it’s not reliable to simply look at one day’s worth of data. In an effort to smooth the volatile nature of the new high and low index, we like to use a broad measure of stocks and a simple moving average.
The universe of stocks we look at is the New York Stock Exchange Composite [New Highs – New Lows Index ($NYHL)]. This sample of stocks includes all issues listed on the New York Stock Exchange (NYSE), which numbers in the thousands.
We like to apply a 20 day simple moving average to the raw index. The 20 day simple moving average smoothes trends in new highs and lows and filters for meaningful changes in trends, albeit relatively shorter-term trends than the 200 day moving average used in the broad market component of the Market Situation.
New High/Low Index Scoring
The new high/low index gets a score of +1 if the 20 day simple moving average is greater than zero. (See Figure 10.9)
Figure 10.9
The new high/low index gets a score of 0 if the 20 day simple moving average is less than zero. (See Figure 10.10)
Figure 10.10