Predict Stock Market Highs and Lows with the NH-NL Ratio

admin 0

The new high/new low (NH-NL) ratio has been around for many years, but different investors use this indicator in different ways. Some investors plot the relationship on a chart using the number zero as a neutral designation with positive numbers equaling more new highs than new lows and a negative number equaling more new lows than new highs based on a specific time period. I developed and used the NH-NL relationship in a completely different way than some of the more popular methods. I started following stocks reaching new highs while reading Investor’s Business Daily newspaper many years ago. I did not use the news highs as an indicator, but only studied the stocks to buy from the list. As I became a more experienced investor, I subconsciously began to gauge the market while watching for new highs to rise or fall. After the stock market bubble burst in 2000, I started recording the difference between the new daily highs and the new daily lows. I would enter them into an excel sheet along with the price and volume of the major market indices and study their relationship. After two years, I was convinced that the highs and lows of the major market could be easily located by aggressively studying the price and volume of the major indices and studying the ups and downs of the NH-NL relationship. Broad market indices often give investors false moves in all directions and many market services and investors have developed new indicators to help gauge the market to try to identify turning points without much success. Many of these secondary indicators manage to show the investor whether the market is weak or strong, but fail to identify the strength or weakness of an inflection point with great precision. Many of these secondary indicators give false signals along with the general market indices.

With several years of serious study behind me using my NH-NL ratio method, I have accurately protected my money during downturns and accurately guided my buying when the market reversed and a new sustained uptrend (not a one) began. head). false).

How do I use my NH-NL ratio?

I start by recording the new daily highs and lows from Investors Business Daily (my preference), but you can use any free or paid service on the web. Over the past five years, I have developed key levels that the market must reach or breach to trigger certain actions. I’m not pulling any of these numbers out of thin air, as they are all based on actual experience and not derived from backtesting. For a market to convince me that it is following and starting a new uptrend, it must present me with a minimum of 500 new highs per day on a consistent basis. When it’s a weekend, I add up the weekly NH-NL totals and divide by the number of active trading days to get the weekly average. The average must have a minimum of 500 shares per day to consider risking more than 50% of my cash on new positions (the new leaders). Once the weekly averages hit 800-1,000+ shares per day, we know the market is in full swing and you can start committing all your trading equity and using the margin. In 2003, the market gave numerous cases where the new highs exceeded 1,000-1,200 shares per day – a very impressive amount. When the market shows strength like this, the trend has become obvious and you should have your money working for you by following the trend. Keep in mind that 75% of all listed stocks will follow the general market trend.

As recently as September and October 2005, the NH-NL relationship has been negative, which means we are seeing more new lows than new highs. When this type of action occurs, you need to lock in profits and move your cash to the margin. It is not safe to invest on the long side of the market when the relationship is negative. Often times, a bear market can form when the relationship weakens and turns negative. If the market confirms a bear market or downtrend, it may be an opportune time to make money by shorting stocks or using advanced options strategies (I only recommend this for advanced and experienced traders). You need to determine if the market is in a downtrend or if it is trading sideways. If you are trading sideways, it will be best to withdraw your cash to the side and wait for a direction to form (either up or down). This article was written and published on October 25, 2005, the first day after the NH-NL relationship returned to the positive side after 13 consecutive days of a negative relationship. The last two weeks have averaged negative indices and some days only hit 15 new high quality stocks. This type of weak stock could signal a bottom in the market as we prepare to form a new rally. The most crucial indicator to watch over the next several weeks will be the NH-NL ratio to see if it can continue to gain strength and push new highs to 500 or more shares per day. If this happens, it will confirm the current indication that a rally has formed in the major indices and you can start to commit more than 50% of your trading stake to new leaders that break off strong footing or stocks that move higher from established support areas.

When I look back at my archived IBD printouts, I can see the strength and weakness that this relationship gave us throughout 2002 and 2003. I remember how the relationship went from negative territory in September 2002 to positive. in October 2002. After reaching positive territory, the new high index spiked into the 800-1,100 range in the first six months of 2003 when we were in a strong bull market, the strongest year since the bubble burst. I don’t know what the next month or year will hold for investors, but you can get a good idea by following this indicator as it returns to the bright side after a very poor October (2005). I once wrote about the Halloween indicator and am now convinced that it has some validity, especially if this NH-NL relationship confirms another rally as October comes to a close.

Leave a Reply

Your email address will not be published. Required fields are marked *