Boost Your Trading Results With New Highs/New Lows

The New Highs/New Lows Indicator lets you glimpse underneath the market’s surface. Use it to find trading opportunities and spot changes in market direction.

What Are New Highs/New Lows

The New Highs/New Lows indicator is part of a group referred to as “Breadth Indicators.”

Breadth indicators tell us a story about what is happening in the markets. As a result, they are often highly correlated with prices. But there are times when breadth indicators diverge significantly from price.

Breadth indicators measure the amount of participation in a move. For example, this could be the number of stocks in the New York Stock Exchange (NYSE) making new 52-week highs or the number of stocks rising minus the number of stocks falling.

Many times you will see breadth indicators change before price. This is called a price/indicator divergence, which can signal the start of a new trend.

Video

In my video, I explain the indicator and show how you can use it as part of a trading strategy.

Why Do We Need Breadth Indicators – Can’t We Look At The Price?

Stock prices are the most critical metric. Most people are looking carefully at the price because this decides how much money we will win or lose.

But prices can be moved around by large traders and market makers. They often push the price lower during a downturn to hit more stop-losses, force margin calls and suck in short sellers.

Breadth Indicators are a lot more difficult to manipulate because they contain data from many individual stocks.

What Do I Need To Know About New Highs/New Lows?

New Highs/New Lows Is A Bounded Indicator

The New Highs/New Lows Indicator is a bounded indicator. A bounded indicator has a maximum and a minimum value. Bounded indicators are also called oscillators because they oscillate between a high and a low.

Bounded indicators can only rise or fall a certain amount before they start reverting to the mean.

Price Is Unbounded

Price is unbounded (at least to the upside). This means that trends can continue for a long time in both directions.

When I studied price/indicator divergences, I found that unbounded indicators are especially useful. This is because they have a natural tendency to reverse and identify a change in trend more clearly.

Example 1 – NYSE New Highs/New Lows Compared to SPY ETF

Chart showing SPY ETF Compared to NYSE New Highs/New Lows

Example 2 – Nasdaq New Highs/New Lows Compared to QQQ ETF

Chart Showing QQQ ETF Compared to Nasdaq New Highs New Lows Breadth Indicator

The Best Breadth Indicators For Trading

In the chart below, you can see three popular breadth indicators on the NYSE.

Each of these indicators has specific strengths and weaknesses.

4 Charts: SPY ETF, McClennan Oscillator NYSE, New Highs/New Lows NYSE, Advance Declines NYSE

New Highs/New Lows

New Highs/New Lows is particularly suited to identifying tops and bottoms. In a bull market, traders expect to see the indicator above zero. Dips below zero can be good buying opportunities when the dominant trend is upwards.

Above all, pay close attention when it is at an extreme level. Think about whether the indicator is signalling a change in trend.

Advance/Decline Issues

The Advance/Decline Issues Indicator compares the number of stocks increasing in price and the number of stocks declining in price.

It tends to be a fast-moving, choppy indicator that works well for identifying and confirming short-term price reversals.

The McClennan Oscillator

The McClennan Oscillator is a nice smooth indicator that moves above and below the zero line.

It is a bit slower than the other indicators and is ideal for identifying trends and confirming price reversals.

Where Can I Find Data For Breadth Indicators?

The Wall Street Journal publishes a list of new highs and new lows: WSJ NH/NL.

StockCharts has a range of different breadth indicators such as this chart: StockCharts New Highs/New Lows.

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