The New High – New Low ratio (NH-NL) has been very accurate over the years when it comes to forecasting major and/ or pivital market lows. It typically logs extreme readings when the market is exhausted. That makes complete sense because most market participants have exhausted all the selling from their portfolios and holdings.
PLEASE CLICK THE IMAGE TO SEE FULL SIZE GRAPHIC:
I can’t confirm that the recent extreme readings of the past week are forecasting a market bottom until the NH-NL ratio turns positive again. The key, please pay attention, to these extreme readings is when it is followed up by the ratio venturing back into positive ground! See the blue arrow examples on the chart. This confirmation signals a MAJOR market reversal.
When that happens, that’s when the confirmation for loading up on equities is ringing loud and clear. But, you may ask, how do we jump in earlier than this confirmation because a good portion of the move is already underway when this finally takes place.
Well, you look for a market reversal within one or more of the major market indexes along with a follow-through day, roughly 4 to 10 days later. A follow-through consists of a major index such as the $COMPQ, $DJIA or $SPX advancing 2% or more on volume larger than the previous day, preferably above average as well. When two or more major indexes follow-through, the signal to start initiating positions has arrived.
Tuesday was day 1 for the most recent “attempt” for a market reversal (even if it’s only short term). We now wait patiently before taking new positions for a follow-through day, beginning tomorrow (day 4).
Stay tuned to see what happens. I am sitting in cash waiting for a signal.
Very nice blog!
I have to admit we are bottoming from a near term perspective, however you will notice in first chart you showed that for a proper bottom to take place, 52 Week New Lows need to diverge with the price action.
In other words, during 1998, 2002 and 2008 into 09, 52 Week New Lows were shrinking while the price was going lower. Therefore, this told us that bears were becoming exhausted as fewer and fewer stocks were making new lows. Eventually, the index stops declining and turns around with a proper bottom.
We do have oversold conditions or at least we did earlier in the week. However, we don’t have that divergence….
Tiho,
I agree. There appears to be another possible leg down before an ultimate bottom so that’s why I cautioned a move higher (in the short term). But even for that to happen, a follow-through must occur.
Hi, nice post there. Among all market timing methods I had a chance to look at, indeed market breadth statistics such as NH, NL are the ones I found most reliable.
I use NH and NL of Nasdaq composite stocks to identify major market trend. A simple moving average cross-over of NH and NL yields surprisingly reliable trend following system.
However, I found that a more detailed look at significant up and significant down stocks number can help us to catch trend reversal earlier.
http://timelysetup.wordpress.com/2011/10/08/daily-market-analysis-for-07-oct-2011-close/
Cheers!
Btw, this is how I use NH NL of Nasdaq composite stocks. It is just a simple moving average cross-over.
http://timelysetup.wordpress.com/market-analysis/primary-market-breadth-guide/
timelysetup,
Very nice site and analysis for the NH NL data. By the way, I have data going back to the 1970’s. Send me an e-mail, maybe we can test further back to further prove the theories.