Note: New High-Low data could be applied to the indexes, exchanges, markets, stock's portfolios or any basket of stocks. These data, due to the way they are measured and calculated, cannot be applied to a single stock or a single ETF (Exchange Traded Fund).
New Highs and New Lows represent the number of all stocks making the new 52-week highs or lows. The New Highs/Lows indicators belong to a group of Breadth indicators or Advance/Decline based indicators and are used in technical analysis to evaluate sentiment of the basket of stocks.
Originally applied to the NYSE (New York Stock Exchange) the Breadth indicators were used to define the U.S. stock market sentiment. At the current moment the New Highs and New Lows are used on different basket of stocks, including but not limited to the NASDAQ 100, S&P 500 and DJI indexes to describe the sentiment of various stock market sectors.
The New Highs and New Lows calculations are simple. New highs represent the number of stock reaching new 52-week highs and the number of New Lows represents the number of stocks traded at new 52-week lows.
In technical analysis New High/Lows are analyzed as individual indicators as well as in combination together. The New Highs/Lows Oscillator and New High/Lows Ratio are well known and often used to define overbought and oversold levels. On the S&P 500 chart below you may see these indicators.
Chart 1: S&P 500 index - New Highs and New Lows indicators.
Investors and technical analysts study New Highs/Lows indicators to see whether they are confirming or diverging from the underlying price movement. When the underlying index (basket of stocks) price moving average rises and the number of 52-week Highs increases (New High/Lows oscillator and ratio move up) then investors consider that the New Highs confirm the bullish market. Vice versa, during the down trend, the increasing number of New Lows would confirm the bearish trend.
Chart 2: S&P 500 index - trading New Highs and New Lows Ratio.
The divergence in between the price trend and the New Highs & New Lows movement could signal a possible change in the market sentiment and as a result may lead to the changes in a trend direction. For instance, a scenario when during an up-trend the number of New Highs started to decline (New Highs/Lows oscillator and ratio starts to move down) may signal a possibility of coming down-turn. At the same time, a situation when during the decline the number of New lows starts to decline (New Highs/Lows oscillator and ratio starts to move up) may signal a possibility of coming recovery.
The New Highs and New Lows calculations are simple. New highs represent the number of stock reaching new 52-week highs and the number of New Lows represents the number of stocks traded at new 52-week lows. There are number of technical indicators used to analyze New Highs-Lows data. Their formulas are presented below.
The New High/Lows Oscillator is calculated by the following formula:
New High/Lows Oscillator = New Highs - New Lows
the New Highs/Lows Ratio is calculated:
New High/Lows Ratio = New Lows / New Highs
and the New Highs/Lows PO (Percentage Oscillator) is calculated:
New High/Lows PO = 100 * (New Highs - New Lows) / (New Highs + New Lows)
As you may notice, in case of New Highs/Lows Ratio formula, when number of New Highs is equal zero the ratio will run into infinity - you will receive an error. The same applied to New Highs/Lows PO formula as there could be days when both Hew Highs and New Lows are equal zero. Since it is quite realistic to have such days when none of stocks from a basket of stocks makes a new high and a new low, especially in case of small basket indexes like Dow Jones Industrials (DJI) index, the New High Low Ratio and PO indicators are rarely used in technical analysis.
Additional problem with Percentage oscillator is that on a backed with small number of stocks in most cases the percentage oscillator value is either -100%, or 0% or +100%. Still the ratio's formula works well on such indexes and NYSE Composite, S&P 500. Yet, it becomes difficult to apply the New Highs/Lows Ratio to Dow Jones Industrials and even NASDAQ 100 indexes. Furthermore, the modified formulas could be used:
New High/Lows Ratio = (New Highs + 1) / (New Lows + 1)
and
New High/Lows PO = 100 * (New Highs - New Lows) / (Number of stocks in the index)
Again, the modified PO formula above could be difficult in use with indexes that have big number of stocks in their baskets (NYSE Composite, Nasdaq 100 Composite, Russell 3000, Russell 2000, Russell 1000 and etc.) - in most cases PO readings will be too close to 0 (zero) central line.
Because of the reasons discussed above, in most cases, technical analysis uses hew Highs/lows Oscillator formula and in some cases simple moving average (SMA) is applied to smooth HL oscillator readings:
New High/Lows Oscillator = SMA(New Highs -- New Lows)
By V. K. for MarketVolume.com