The New High – New Low (NH-NL) Ratio plummeted into negative territory for the first time since early March and closed at its lowest point since July of 2006. Is it a coincidence that the ratio is dropping to its lowest level since the start of the most recent up-trend in July 2006? Could the NH-NL ratio be marking the beginning and the end of the strong run from 2006 to 2007?
*click the image for a larger view*
The 30% rise in the NASDAQ started in July 2006, precisely when the NH-NL ratio was building a base before blast off into a territory labeled strength on the accompanying chart. Aside from a few swings and a quick blip in February, the NH-NL ratio has stayed at or near the 80% strength calculation as late as the June 2007.
The NASDAQ corrected for four months in the spring of 2006, the same period of time that the NH-NL ratio decided to play see-saw in the area labeled “weakness” on the chart. The index did violate the 200-day moving average in the spring of 2006 so the downtrend should have been expected; so, we will now have to watch the present action to determine if the current market would like to follow a similar pattern.
The NH-NL ratio averaged a negative (32%) rating from May 20, 2006 to August 12, 2006 with a bottom reading of (76.64%) ending the week of June 17, 2006. Last week’s NH-NL ratio gave us an average of 572 new lows per day, the largest reading since I started tracking this information on the blog (several years). Last week gave us a negative percentage reading of (60.34%) which was better than June’s low but that was due to the higher number of new highs in the calculation. We only averaged 310 new lows per day during the bottom of the 2006 market, 45% fewer new lows than last week.
We had a reading of 79 new highs and 939 new lows last Thursday, one of the weakest readings I have recorded over the past several years. We must date back to the bear market of 2000-2002 to see these types of numbers. I will be searching my data for a reading of 1,000+ new lows in one day over the past several years to see what happened immediately following such an extreme level.
So what does this all mean?
It means that the market should be ready to correct by 10% based on the history of my NH-NL studies. I admit that my studies of this indicator only stretch this decade but they have been extremely reliable. Tie this together with the fact that crude oil is making new all-time highs and the fact that the NASDAQ and DOW are still near multi-year highs and a yearly gain hovering near 30%. The complete list of weekly NH-NL ratios are located at the bottom of this post (or through the link).
I can’t and won’t be predicting when this correction will happen but it should happen. To prepare, I have already sold several large positions over the past couple of weeks as noted on multiple blog posts. I have been in profit taking mode and must pay attention as a trend follower because draw-downs can be substantial if I am not careful.
Let me know your thoughts on the NH-NL Ratio readings. To see the history of my NH-NL post, visit this category: NH-NL Ratio
Weekly New High – New Low Ratio (NH-NL) for 2007:
Saturday, January 6, 2007: 279-67
Saturday, January 13, 2007: 344-39
Saturday, January 13, 2007: 281-46
Saturday, January 27, 2007: 316-55
Saturday, February 3, 2007: 502-45
Saturday, February 10, 2007: 558-53
Saturday, February 17, 2007: 428-48
Saturday, February 24, 2007: 556-42
Saturday, March 3, 2007: 187-130
Saturday, March 10, 2007: 96-125
Saturday, March 17, 2007: 114-145
Saturday, March 24, 2007: 284-53
Saturday, March 31, 2007: 227-68
Saturday, March 31, 2007: 227-68
*April is excluded as I was in Hawaii – sorry*
Saturday, May 5, 2007: 418-86
Saturday, May 12, 2007: 387-72
Saturday, May 19, 2007: 367-129
Saturday, May 26, 2007: 428-73
Saturday, June 2, 2007: 535-63
Saturday, June 9, 2007: 291-80
Saturday, June 16, 2007: 271-116
Saturday, June 23, 2007: 326-104
Saturday, June 30, 2007: 180-146
Saturday, July 7, 2007: 438-97
Saturday, July 14, 2007: 492-152
Saturday, July 21, 2007: 426-217
Saturday, July 28, 2007: 142-572
Hi Chris,
Your NH-NL Ratio technique helped give me more protection this time. Typically, over the last 10 years I have just left my 401K account sitting in several funds to ride the ups and downs of the market – losing those gains. Thanks to the education you have provided, I started following the NH-NL since the March correction. By noticing the number of increasing NLs that were starting to show up over the past few months, I moved all funds straight to cash in June with anticipation of a shake-up – and it happened! The number of red-flags that continued to show up was right on the money. I am now waiting for a movement of strength with the NH-NL along with the 50Rs before I make a move back in (since I can’t move this money around as fast as I could with my brokerage account).
Currently holding in my brokerage account with a new position on EDU only – up 8.85% . There could be a possible retracement back to $59.00 so I can get 2.5R out of this one again. If it can break the 59.00 area, I would be interested to see if your $60-$100 theory comes into play here soon in the next few months as long as the market can hold up.
Steven,
I wrote a post today based on your comments of the $60-$100 run. I bailed out of GRMN much too early and ignored the big picture. Well, I recently sold out of EDU as well and took the profits (much larger than the GRMN gain).
I will continue to follow EDU for a possible $60-$100 run.
Great info here Chris.
I’m curious – where online can I find a record of daily highs and lows?
Kris
I remember reading the interview with Mark Cook in Stock Market Wizards, and how he had developed his cumulative tick indicator to predict coming index highs and lows. One of his strategies was to purchase call options on the S&P 500 when his indicators predicted an upturn in the market.
Now I’ve never purchased an option on an index but would it be a worthwhile strategy to adopt here if we are looking at a continued correction? (buying puts on an index I mean)… and alternatively, on the rebound buying calls?
Kris,
I get my numbers rom IBD (Investor’s Business Daily) but you could use any source on the web for free. Just make sure you stay consistent with your data provider.
I have bought puts in individual stocks over the past week so I guess the SPY puts could work. I have never bought or sold an option for an index either.