3 Simple Strategies for How to Use the New Highs/Lows Ratio when Day Trading
The new High new Low ratio is a technical indicator that is very simple. It measures the number of securities trading on the New York Stock Exchange (NYSE) which have hit a 52-week high and counts the number of securities that have hit a 52-week low. The new high and low indicator counts all securities listed, including stocks, preferred stocks, closed end funds and ETF’s.
Traders and investors have used the new highs and new lows indicator to gauge the market sentiment. Broadly speaking, the higher the number of stocks reaching a new 52-week high, the larger the market advances are which is assumed to occur on a wide range of issues that spurred investors into the bullish mode.
Similarly, when the count of the new high stocks starts to fall but you see that the stock index is still making highs, it indicates that only a few stocks are participating in this rally. Therefore this divergence offers a sign of an impending declining.
From a day trader or a technical trader perspective, the new high and new low indicator or new high/low ratio indicator is akin to using a technical oscillator on the chart and comparing it to price. For example, the RSI, which is based on the price, is a useful indicator to signal divergence in the security.
Under normal circumstances, the prevailing theory is that price and its oscillator (or in the context of this article, the new high/ new low indicator) must converge at all times. So when a security is at a high, the oscillator or the RSI must also confirm this by posting a high, same when the security posts a low, the RSI must also post a low.
A divergence is said to occur when either the security or the oscillator do not conform to each other.
The chart below shows a simple illustration of the convergence and divergence between a security and an indicator. This same principle is applied to the stock markets as well. The only difference here being that, one could use the major stock market index such as the Dow Jones or the S&P500 and compare it to the new high new low indicator to get an idea if the new highs in the index are as a result of broader stock market strength or if the rally to new highs was based on just a few stocks in the market.
While convergence will tell you that the new highs or lows are a result of broader participation, divergence can be a powerful tool as it can point you to potential weakness. When a new 52-week high in a stock index fails to be confirmed by the broader stock market, by means of using the new high new log indicator, it is a warning to investors to be careful when taking on new positions.
What is the new high new low ratio indicator?
The new high new low ratio indicator or NH/NL Ratio for short as explained earlier is a ratio of the number of stocks making a 52-week high and the number of stocks making a 52-week low. This indicator visualizes this phenomenon and can be useful for the stock trader to understand the relationship of the stocks that are making new highs and lows. A higher reading in the NH/NL ratio indicator means that more stocks are participating in the rally.
The calculation, as you might have guessed by now is very simple.
The new highs and new lows indicator is published on a weekly basis at any major financial website. The general rule of thumb is:
the market is positive when the NH/NL ratio is biased to the upside. Ex: 400 new highs to 45 new lows
the market is negative when the NH/NL ratio is biased to the downside. Ex: 40 new highs to 350 new lows
the market is churning or is split if the NH/NL ratio is even. Ex: 400 new highs and 400 new lows