By August 16, the SPY had dropped over 12% and was back to the $137 level. The number of new highs had dropped to just 7. By the middle of September, the fears of a financial crisis had subsided and stocks began to rally more sharply. By October 10, the SPY made a new high at $157.52, line A. This new price high was accompanied by only 345 stocks making new highs (point 5).
This divergence from the early June highs, line b, was the second significant divergence that had formed since the late 2006 high. This has indicated that fewer and fewer stocks were pushing the stock market to new highs and was a sign of a technically weak market. At the time, similar long-term divergences were evident in the NYSE Advance/Decline line.
So what about the current market? Though not included on the chart, the greatest number of new highs since the 2009 low was 693, which was recorded on April 26, 2010. This was prior to a 17% decline that ended on July 1, 2010.
From these lows, the new highs expanded to 569 on November 4, 2010 (line a). The NYSE Composite bottomed at the end of November and continued to rally until April of 2011 as it gained almost 18%. The number of new highs declined as the market moved higher. As the NYSE was making a new high at 8718, only 361 stocks were making new highs (line b) as they were diverging sharply, line b.
The following five-month correction dropped the NYSE Composite 26.4% to a low of 6414 on October 10, 2011. By September, many were convinced that we were in another bear market. This was contrary to the positive intermediate-term signals from the NYSE Advance/Decline line and the high level of negative sentiment, Can Doom and Gloom Save the Market?, that suggested the market was closer to a bottom.
By the middle of October, there were clear signs that the market had bottomed and once again the number of new highs began to expand into the end of the year. The new highs peaked at 304 on February 1 and then started to decline even though the NYSE Composite continued to move higher.
The new highs made a lower high (line c) at 208 on May 1, indicating that fewer stocks were moving the market higher. But by early June, there were signs from the Advance/Decline data that the decline was over. By the end of July, the number of new highs had surged back to 296. They continued to expand into the September highs, line d, peaking at 495. This level of new highs has not yet been exceeded, line e, even though the market has continued higher. On January 2, 2013, there were 456 new highs but just 446 on Tuesday, January 22.
So, is there a better way to utilize the new high, new low data? Some analysts just follow the differential of the new highs minus the new lows. This is plotted in the middle of the figure above.
Though its divergences occasionally give some good signals, the pattern is too irregular most of the time for me to find it beneficial. One technique that I have been looking at recently is to run a five-period WMA (5WMA) and a 13-period SMA (13SMA) of this difference.
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