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New Highs and Lows

By: HGH Associated Press

Article Category: SML Technical Analysis

New Highs and New Lows indicators show the number of stocks hitting new 52-week highs or lows respectively. As a rule these indicators are applied to the basket of stocks: indexes and exchanges. The most common application of this technical study is applying it to the New Your Stock Exchange (NYSE).

The same as advance/decline based indicators, the new highs and new lows based indicators belong to a group of the Breadth indicators and are used in technical analysis to analyze stock market sentiment in order to confirm the current trend or define the moment of possible changes in the market sentiment which may lead to the reversal in a trend direction.

The most popular indicators based on the new highs and new lows numbers are “New Highs/Lows Oscillator” and “New Highs/Lows Ratio” which are calculated by the following formulas:

New High/Lows Oscillator = New Highs - New Lows

New High/Lows Ratio = (New Highs - New Lows) / (New Highs + New Lows) * 100

As it was mentioned above, the new highs/lows are used to confirm a trend and to spot trend reversal points.

Technical analysis rules tell us that when the New Highs/Lows Oscillator or ratio moves up along with the price trend (price moving average could be used in comparison) then that reveals that the bullish sentiment is dominant on the market and it confirms bullish trend. At the same time when the New Highs/Lows Oscillator or ratio moves down and the price drops then that reveals that the bearish sentiment is dominant on the market and it confirms bearish trend.

To spot the possible trend reversal point the principle of divergence is used. Technical analysis rules tell us when the New Highs/Lows Oscillator or ratio starts to move up after a decline while the price (price moving average) still declines it reveals that the sentiment started to change from the bearish into bullish and there is a possibility that it may affect the down-trend and push the index up. The opposite statement is true for the moments when the New Highs/Lows Oscillator or ratio starts to move down while the price still raises – it may signal about coming of a down-trend.

The new highs and new lows based technical indicators are used by investors to look at underground processes on the stock market and very often are used in trading systems to confirm a trend and spot reversal points. When the indexes are still in the up-trend and the whole market is still bearish the changes in the new highs/lows trend shows that some stocks started to become oversold and weak and it could be as a first sign that other stocks could be involved in it and become oversold and that the index and stock market may crash down.