Market Breadth: 52-Week Highs/Lows
Because of the broad market implications and forceful nature of new 52-week highs/lows, market technicians keep a close eye on this statistic. The field of technical analysis has designed a number of indicators to grade the underlying momentum created by the events driving the market in either direction.
Forces of Highs and Lows
When shares of a publicly traded company hit a new high for the year, everyone involved can rest assured that things are on the right track. Not only are investors rewarded, but the work of the company's CEO, executives and employees is validated. All this optimism in the business attracts new attention from traders and institutional investors looking to capitalize on the stock's momentum.
Rallies from a new 52-week high can be explosive, picking up steam as traders migrate to stocks that are making a consistent profit. If the broader market begins to see many shares making new highs, that has the power to drive most everything up, squeezing short sellers and igniting a rally - perhaps even a new bull market.
Of course, the opposite is also true. When a stock hits a new 52-week low, something at that business has definitely gone awry, resulting in angry investors. A new 52-week low could mean margins are being squeezed, customers are drying up, or a brand is shedding market share. The negativity can feed on itself as short sellers drive the stock lower and fund managers make the tough decision to take their lumps and wash their hands of a bad trade. Bear markets often begin after a business reports a disappointing performance, forcing down expectations for the broader market.
Each day the financial news networks and websites report the number of new highs and new lows. That data is incorporated into market breadth indicators and then compared to index charts to judge market force and direction. There are five popular indicators that are constructed with new high/low data: (1) the cumulative new high/low line, (2) the new-high minus new-low oscillator, (3) the new high/low ratio, (4) the percentage of new high to new high plus new low and (5) the percentage of new highs to total market. It is important to remember that the differences between these five indicators are subtle and can best be mastered by continued observance.
1. Cumulative New High/Low Line
The formula for the cumulative new high/low line looks like this:
The values for cumulative new high/low are differentiated by market, whether the NYSE or Nasdaq - stocks are not all lumped together. This indicator is plotted as a line connecting each day's value, and then it is usually compared to a price plot. Generally, the chart will look similar to the price plot, with the two making new highs and lows near the same spots.
Today's Value = Yesterday's Value + (Today's New Highs - Today's New Lows)
Just like the breadth indicators using volume, the cumulative new high/low signals a change in momentum and could be forecasting a new direction in price when the line diverges from the price chart. When the new high/low indicator gets ahead of the price chart, this signals strong momentum in the underlying market.
While a plot of the 52-week high/low line is most common, any time frame can be used (such as 100-day or 200-day). Moving averages and other technical indicators can be applied to the cumulative new high/low line just like a price chart.
2. New-High Minus New-Low Oscillator
The formula for the new-high minus new-low oscillator looks like this:
|Oscillator = Today\'s New Highs – Today\'s New Lows|
This formula creates a fast oscillator that can be smoothed or fine-tuned with a moving average. The oscillator revolves around a zero line, signaling a change in trend when it crosses above or below zero. The extremes of the oscillator signal overbought and oversold conditions respectively. (An extreme is usually around 80% or 20%, but the definition can be tuned using market specific data.) The most common are the 52-week highs/lows, but any time frame can be used to construct this oscillator.
3. New High/Low Ratio
The formula for new high/low ratio looks like this:
|Ratio = Today\'s New Highs / Today\'s New Lows|
This ratio is like an oscillator because it revolves around the value 1. Although this oscillator is much slower than the oscillator discussed above, it can be smoothed further using a moving average.
Anything below 1 means there are more stocks making new lows than highs - this is extremely negative. Because of the fractional nature of the negative territory, a logarithmic chart enhances readability. The indicator spends more time above 1, meaning more stocks are making new highs than lows. Since this chart is a ratio, it is impossible for the value to be less than zero. The extremes of the indicator represent overbought/oversold territory. The new high/low indicator can be examined further using other technical indicators - the relative strength index (RSI) is especially useful.
4. Percentage of New-High to New High + New Low
The formula for this breadth indicator looks like this:
|% New Highs = Today\'s New Highs / (Today\'s New Highs + Today\'s New Lows)|
The reverse of this formula can also be used to construct the percent of new lows:
|% New Lows = Today\'s New Lows / (Today\'s New Highs + Today\'s New Lows)|
Both indicators are percentages, so, like the high/low ratio, their values will always be between 0 and 1, never negative. Obviously, when there is a high percentage of stocks that are making new highs, this is positive for the broader market; conversely, a large percentage of new lows doesn't bode well for the market.
Technicians monitor the shape and direction of this indicator to judge momentum, and they monitor extremes to judge overbought/oversold territory. This indicator can be compared to the underlying price chart and analyzed further using other tools of technical analysis. As with all these high/low indicators, any time frame can be used (52-weeks being the most common).
This indicator's formula looks like this:
|% New Highs = Today\'s New Highs / Total # of Listed Stocks in Given Market|
The opposite formula can also be constructed:
|% New Lows = Today\'s New Lows / Total # of Listed Stocks in Given Market|
The indicators that measure the percentage of new highs or lows to total market are very similar to the percentage we looked at above: values cannot be less than zero, direction and shape determine momentum, and other technical indicators are applicable. Since you are comparing a much larger base to the new highs or lows, the percentage values here will be much lower.
Stockcharts.com provides free charts that can be customized for many of the market breadth indicators we discussed here. For others, technicians will need to search for a fee-based charting service that provides a wider array of breadth data.
Market Breadth: Advance/Decline Indicators
A form of technical analysis that looks at the range between ...
A momentum indicator that uses a stock’s price and volume to ...
A momentum indicator that uses volume flow to predict changes ...
A technical indicator that relies on changes in a security’s ...
An indicator that tracks the relationship between volume and ...
The Force Index is an oscillator that fluctuates above and below ...
Find out what technical chartists mean by a double top trend in a security's price movements, and learn why double tops are ...
Read about how to identify and then build a trading strategy around a rising three methods pattern on a Japanese candlestick ...
Discover the advantages of using RSI as a financial tool. One benefit is that it helps traders make quick market entries ...
Understand how experts use the relative strength index (RSI) to improve their knowledge of a stock and its history in the ...