New highs/new lows: what they tell us
When we think of new high and new low data, we
normally think of the commonly published 52-week highs and lows. For a short
term trader, however, 52-week data is a relatively blunt instrument. Many days,
the majority of issues make neither annual highs nor lows. It’s when we examine
the number of stocks making fresh highs or lows on a shorter time frame that
patterns become apparent.
This approach to new highs and lows reflects two
principles that have guided my market research:
1) Examine, not just what market
indices are doing, but what is happening among the majority of individual
stocks. Many times, the market index is
less than the sum of its parts.
2) Examine data that other traders
aren’t looking at. The most common market information is also the
most picked over. Investigate measures and time frames that others aren’t
scouring.
The chart below is an example of these principles
in action. The data are taken from
the Weblog on my personal
site and represent the number of stocks on the NYSE, NASDAQ, and ASE that
have made new highs (blue line) or new lows (red line) over the past twenty
trading sessions.
Notice two things:
1) Recently,
we’ve been making fewer new highs than we did earlier in the month, despite the
large cap indices moving to new price highs;
2) Even as new
highs have recently been over 1000, we’re also seeing over 500 issues making new
monthly lows.
What does it mean when we have a market in which
many stocks are making new highs, but also many are making new lows? And is this
bullish, bearish, or neutral for stocks going forward? Let’s take a look.
Since 2003 (N = 927 trading days), we’ve had 402
days in which there have been more than 1000 issues making fresh 20-day highs.
Ten days later, the S&P 500 Index (SPY) is up by an average of only .06% (217
up, 185 down). Conversely, when we’ve had fewer than 1000 issues making 20-day
highs (N = 525), SPY has been up ten days later by an average of .67% (336 up,
189 down).
In other words, the entire bullish bias of the
2003-2006 period has been eliminated for traders who bought the market when it
was strong (i.e., when 1000 or more issues were making fresh 20-day highs).
How about when, as recently, we have more than
1000 new 20-day highs, but also more than 500 new 20-day lows. Since 2003, we’ve
had 62 of those occurrences. Ten days later, SPY has been down on average by
-.24% (26 up, 36 down). During 2006, we’ve had 21 days with more than 1000 new
20-day highs and more than 500 new 20-day lows. Ten days later, SPY has been
down by an average of -.47% (11 up, 10 down).
What this suggests is that a market with
relatively high new highs *and* relatively high new lows is frequently a market
in the process of topping. The new highs reflect the strong stocks that are
taking the broad averages to new price highs, but the new lows reflect
underlying weak sectors that eventually drag down the broader market.
A rising tide is supposed to lift all boats. If
some boats remain underwater, one must question the strength of the tide.
Brett N. Steenbarger, Ph.D. is Associate Clinical
Professor of Psychiatry and Behavioral Sciences at SUNY Upstate Medical
University in Syracuse, NY and author of
The Psychology of Trading (Wiley, 2003). As Director of Trader
Development for Kingstree Trading, LLC in Chicago, he has mentored numerous
professional traders and coordinated a training program for traders. An active
trader of the stock indexes, Brett utilizes statistically-based pattern
recognition for intraday trading. Brett does not offer commercial services to
traders, but maintains an archive of articles and a trading blog at
www.brettsteenbarger.com and a
blog of market analytics at
www.traderfeed.blogspot.com. His book, Enhancing Trader Performance,
is due for publication this fall (Wiley).