What is the High-Low Index?
The high-low index compares stocks that are reaching their 52-week highs with stocks that are hitting their 52-week lows. The high-low index is used by investors and traders to confirm the prevailing market trend of a broad market index, such as the Standard and Poor’s 500 index (S&P 500).
Understanding the High-Low Index
The high-low index is simply a 10-day moving average of the record high percent indicator, which divides new highs by new highs plus new lows. The record high percent indicator is calculated as follows:
Record High Percent=New Highs+New LowsNew Highs×100
Investors consider the high-low index to be bullish if it is positive and rising, and bearish if it is negative and falling. Since the index can be volatile on a day-to-day basis, market technicians generally apply a moving average on the data to smooth out the daily swings. This helps generate more reliable signals.
Interpreting the High-Low Index
A high-low index above 50 means more stocks are reaching 52-week highs than reaching 52 lows. Conversely, a reading below 50 shows that more stocks are making 52-week lows compared to stocks making 52-week highs. Therefore, investors and traders are generally bullish when the index rises above 50 and bearish when it declines below 50. Typically, readings above 70 indicate that the market is trending higher, while a reading below 30 suggests that the market is in a downtrend. Investors should also be aware that If the market is trending strongly, the high-low index can give extreme readings for a prolonged period.
Trading with the High-Low Index
Many traders add a 20-day moving average to the high-low index and use it as a signal line to enter a trade. The index generates a buy signal when it crosses above its moving average, and a sell signal when it crosses below its moving average. Traders should filter the signals generated by the high-low index with other technical indicators. For example, a trader might require the relative strength index (RSI) to be above zero when the index crosses above its 20-day moving average to confirm upward momentum.
The high-low index can also be used to form a bullish or bearish bias. For instance, if the indicator is above 50, a trader may decide to trade on the long side of the market only.