How To Use TM’s Indicators: The 60-Day New Highs/Lows On Double Volume List
New 60-day highs or lows accompanied by double volume
(NH/NL DV) are
important technical signals, because they often coincide with key market events.
For example, they commonly precede explosive moves, as informed traders jump on
(or dump) a stock. On the other hand, they also can signal exhaustion points in
a market.
We first will analyze what new highs or lows on high volume say about market
action, and discuss the other analysis techniques you can use to confirm these
signals and help determine if a stock is at the beginning or end of a trend.
Market Dynamics
New 60-day highs/lows on double volume are exactly what they sound like: When
a stock makes at least a two-month (approximately 43 trading days) high or low,
on twice or more of its average daily volume.
Volume drives a market higher or lower. When a stock makes a new high on
heavy volume, it suggests investors are flooding into the stock and their
euphoria will push it higher.
(See Figure 1.) But, such action also occurs at the
end of price moves as the last-gasp buyers jump into the market. (See Figure
2.)
If the final buyers are dog-piling into the market and the sellers are willing
to accommodate them, the market will stall and eventually reverse when there are
no buyers left to enter the market.
Figure
1.
Stocks often make new 60-day highs on double volume (NHDV) immediately
before exploding higher.
(
PECS |
Quote |
Chart |
News |
PowerRating) takes off after making a NHDV on 11/14/01.
Figure
2. New
60-day highs on double volume often mark the end of a rally as the last
buyers rush into the market. Notice the NHDV on 12/5/01
marks
the end of the up move for
(
THQ |
Quote |
Chart |
News |
PowerRating).
A New Beginning Or The End Of The Line?
Trading is a matter of assembling various puzzle pieces to complete a picture
of the market. Because 60-day new highs/lows on double volume do not by
themselves indicate the direction the market is headed, it is necessary to take
other factors into consideration. Combining chart analysis with the NH/NL DV
signal helps define the nature of the pattern–whether a particular new high is
a breakout or exhaustion point. Other bullish or bearish technical signals put
the NH/NL DV signal in context. In
Figure 3, for example, when a 60-day new high
on double volume occurs after a bullish cup-and-handle pattern, it suggests the
stock is headed higher.
Figure
3.
When a new 60-day high follows a bullish pattern, it often leads to much
higher prices.
(
GNSS |
Quote |
Chart |
News |
PowerRating) is a cup and handle.
You also can use something as simple as overall trend direction to confirm a
signal. A 60-day new low on double volume suggests after a long downtrend
suggest the trend will continue or quite possibly accelerate.
(See Figure 4.)
Figure 4. New
60-day highs/lows on double volume suggest trend continuation (and often
acceleration) when they occur after a trend is established.
(
ENE |
Quote |
Chart |
News |
PowerRating) was in
a down trend before it formed a NL. Enron gave several NLDV
signals before imploding entirely.
However, it is important to remember that a market will not continue to go
down just because it already has dropped and a 60-day new low on double volume
has occurred. You must be very careful when a NH/NL DV follows a parabolic move,
for example. NH/NL DV signals in these situations often imply the end of a
trend, as the last traders rush into the stock and the “smart money”
takes the other side.
(See Figure 5.)
Figure
5. New 60-day
lows on double volume (NLDV) suggest trend exhaustion, as the last of
the longs lose hope and dump their positions. Notice that
(
AMR |
Quote |
Chart |
News |
PowerRating) loses nearly half its value in two weeks, ending with an NLDV. This
proved to be the stock’s precise bottom.
Classic chart patterns like double tops also offer clues about market
direction. For example, if a stock forms a double top on twice its average
volume, the stock’s failure to rally past the first peak of the formation
suggests those who bought the first peak are looking to bail out of their
positions at break-even. It also may suggest short sellers are attempting to
pick a top. (See Figure 6.)
Figure 6.
Classic chart
analysis helps determine if a new 60-Day high on double volume (NHDV) is
a top rather than a trend continuation or breakout.
(
BC |
Quote |
Chart |
News |
PowerRating) makes
an NHDV but fails to follow though, forming a double top.
While markets often take off (or bottom or top) immediately after a NH/NL DV
forms, they do not always conform to this basic model. Stocks often move
sideways or “rest” from as short as a few days to as long as a few
weeks after making a NH/NL DV. This may happen because a trader (with
information about the market) does not want to execute his entire position at
one time, for fear he will attract the attention of other traders and the market
will get away from him. When a stock hits a new high (or low) on twice its
average volume, it may be worthwhile to pay attention to it for the next several
days or weeks–the buyer may return and kick the market back into gear. (See
Figure 7.)
Figure
7. When a stock
makes a new 60-day high or low on double volume, it may be worth
watching to see if the buyers (or sellers ) return
(
INVN |
Quote |
Chart |
News |
PowerRating) makes an NHDV
(A), trades sideways for three weeks,
makes another NHDV (B), trades sideways another three weeks, and then
makes yet another NHDV (C), then trades sideways one more
week, before
skyrocketing higher.
Summary
60-day new highs/lows on double volume are useful tools because they often
coincide with important market developments, i.e., breakouts and trend
continuations, or exhaustion moves. They also can reflect smart money attempting
to accumulate (or dump) a stock. Alone, they do not imply market direction;
other analysis tools can be used to put these signals in context and give a
clearer picture of price action.
Stocks in long bases that make new highs on twice their average volume may
explode because traders with inside knowledge are accumulating the stock.
Markets that have made parabolic moves before forming a NH/NL DV may have topped
out as the last of the traders rush into the market. Classical chart formations
like cup-and-handle patterns and double tops also indicate whether the market is
making a breakout or exhaustion move. Finally, stocks do not always conform to
this model. A market often will make a NH/NL DV and then trade sideways for a
few days or weeks before making a move.
New
60-day Highs on Double Volume and New
60-day Lows on Double Volume lists are updated daily on our site.
How To Find It
From the TradingMarkets home page,
click “Stocks,” then “Indicators.” Look under both
“Uptrending Indicators” and “Downtrending Indicators.”
When it comes down to it, there are
only two important factors in the stock market: price and volume. Every
“man-made” indicator keys off these two. By using the New
60-day Highs/Lows
on Double Volume lists, you are dealing directly with what counts the
most.
Why Use It?
Simple. It will save you time, make
your life easier, and give you some of the most effective setups currently in
the market.
Who Can Benefit
From It?
Intermediate-term traders, as well
as daytraders and options traders. These stocks will attract a lot of
attention, at least for a few days. Momentum traders will be looking for
follow-through. Daytraders can expect more volatility near-term. For option
traders, because there is a high probability for short-term follow through,
these are interesting plays for contracts that have little time value left.
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