When the overall market is going higher, it's easy to assume that most stocks are following the lead of the indices. While sometimes this may be true, under the surface, there may be more stocks declining while the market is advancing.
To be certain of a market's trend, traders must analyze the trend of all stocks.
The New Highs New Lows indicator is a market breadth tool that allows traders to view the overall health of the market by counting the number of stocks making New Highs vs New Lows.
What Is The New Highs New Lows Indicator?
When we examine the New High/New Low indicator, we examine the individual stocks' previous 52-week performance.
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- A stock makes a New High when it makes its highest price in the last 52 weeks.
- A stock makes a New Low when it makes its lowest price in the last 52 weeks.
The Net New High—New Low (NH-NL) indicator subtracts the total value of stocks making new highs from the total value of stocks making new lows.
Is The Market Healthy?
A strong market should see more stocks making new 52-week highs. In a technically sound uptrend, you will notice new highs outpacing new lows.
A weak market will see more stocks making new 52-week lows. In a market showing distribution, watch out for new lows outpacing new highs.
When a market is uncertain, the NH-NL indicator might bounce around until a new trend is defined.
Trend Confirmation
When a market turns, and a new trend is established, you should see the individual stocks confirming the action.
When a new bull market emerges after a bear market, you will see more stocks making new highs as the indices reverse and head higher.
SPY 2017 Bull Market
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New highs began to pick up after the market bottomed in the first quarter of 2016. Throughout the end of the year and 2017, there was an expansion of new highs, confirming one of the strongest bull markets. The NH-NL indicator confirmed more net new highs when the market continued to make new highs.
Near the end of a bull market, you will see more stocks making new lows while the indices begin to stall and head lower.
SPY 2007-2008 Bear Market
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Before the market peaked in 2007, we saw a cluster of new lows like we hadn't seen in months. When the market made a new high, the NH-NL did not. When we observed new lows continue to outpace new highs, the market sank into a multi-year bear market. The NH-NL indicator confirmed the weakness when new lows outpaced new highs.
Trend Reversals
The Net New Highs – New Lows can also be used as a gauge to determine when a trend will reverse.
If the index is making new highs but the stocks are making new lows, look for an uptrend to reverse.
QQQ 2021 Uptrend Reverses
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The highly euphoric 2020 market carried over into 2021, but the trend became uncertain near the end of the year. As the general indices continued higher, under the surface the NH-NL indicator hinted that stocks are no longer making new highs. In the Fall of 2021, when the market was still making highs, we began to witness individual stocks making new lows, which ultimately began the 2022 bear market.
If you begin to see stocks making new highs while the index is making new lows, be on the lookout for a new bull market to emerge.
QQQ 2022 Bear Market Ends
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2022 saw a large amount of new lows while the market declined. When the indices made new lows, we observed the individual stocks did not make as many new lows. Into January of 2023 we began to see more new highs while the market retested its lows.
Deepvue's NH-NL Indicator
When analyzing market breadth, add Deepvue's Net New Highs/Lows indicator to your charts.
When changing the settings, you will be able to view NH-NL for the AMEX, NASDAQ, NYSE, or all USA stocks.
Selecting “Background” will display shaded areas on the third day of a new emerging trend.
Use Deepvue's NH-NL indicator on your charts when monitoring the breadth of the major indices.
Key Takeaway
The NH-NL breadth indicator is a great way to analyze the overall health of the market and helps traders determine its health.
Use the NH-NL indicator to look for clues that support a strong trend and for divergences that may hint that the trend is about to reverse.
Remember:
- A strong uptrend will be confirmed with more stocks making new 52-week highs.
- Indices making new highs, without seeing individual stocks making new highs, might suggest a bearish reversal may come.
- A bullish reversal may commence when new highs begin clustering while the indices retest recent lows.
