Net New Highs is a simple found by subtracting new lows from new highs. "New lows" is the number of stocks recording new 52-week lows. "New highs" is the number of stock making new 52-week highs. This indicator provides an immediate score for internal strength or weakness in the market. There are more new highs when the indicator is positive, which favors the bulls. There are more new lows when the indicator is negative, which favors the bears. Chartists can analyze daily fluctuations or a moving average can be applied to create an oscillator that meanders above and below the zero line. Net New Highs can also be used like the AD Line by analyzing Cumulative Net New Highs.
Net New Highs = New Highs - New Lows Cumulative Net New Highs = Prior Cumulative Net New Highs + Current Net New Highs
In general, a stock index is deemed strong (bullish) when Net New Highs is positive, which means new highs exceed new lows. Conversely, a stock index is deemed weak (bearish) when Net New Highs is negative, which means new lows exceed new highs. The degree of bullishness or bearishness depends on level of Net New Highs. This value is also dependent on the number of stocks in the index. The Nasdaq and NYSE are usually in strong uptrends when Net New Highs is consistently above +100. Conversely, strong downtrends usually prevail when Net New Highs is consistently below -100.
New 52-week highs and new 52-week lows are considered lagging indicators. In other words, the market will change direction long before there is a significant shift in new highs and new lows. Think about it. It takes at least 52 weeks to forge a new high or a new low. An extended move is required for a stock to record a 52-week milestone. There are plenty of new highs after an extended advance, just as there are plenty of new lows after an extended decline. New highs dry up when a stock index corrects after an extended advance. Some new lows will surface during a correction, but it takes an extended decline to generate a serious increase in new lows. Similarly, new lows dry up when a stock index bounces after an extended decline. Some new highs may surface during this bounce, but it takes an extended advance to generate a serious increase in new highs.
Actual Net New Highs can be used to define the overall trend. As noted above, the bulls have the edge when Net New Highs are positive and the bears have the edge when Net New Highs are negative. Chart 2 below shows the NY Composite ($NYA) with NYSE Net New Highs ($NYHL) in 2009. There are four distinct periods here: strong downtrend, recovery, strengthening and strong uptrend. The NY Composite transitioned from a strong downtrend to a strong uptrend quite fast, but Net New Highs did not adjust nearly as fast. First, Net New Highs were decidedly negative from January to early March as the downtrend extended. Don't forget that the NY Composite had been moving lower throughout 2008 and was in a well established downtrend. The NY Composite bottomed in early March and moved sharply higher until early June. Despite this strong advance, Net New Highs did not increase significantly. This is the lagging nature of the indicator. Net New Highs did not increase until mid July and did not exceed +100 until August.
Net New Highs can also be shown as a percentage of the total issues traded. Sharpcharts users can do this with a ratio chart. Simply enter $NYHL:$NYTOT in the symbol box. The first symbol is Net New Highs for the index and the second symbol is total issues for the index. It is important to use the corresponding indices and totals. For example, use NYSE Net New Highs with total issues for the NYSE and Nasdaq Net New Highs with total issues for the Nasdaq. The lower indicator window shows NYSE Net New Highs ($NYHL) as a percentage of NYSE Total Issues ($NYTOT). The plot looks exactly the same, but you can see that negative Net New Highs were more than 20% (-.20) of total issues in March and positive Net New Highs were more than 10% (.10) of total issues in October. By using percentages, we can compare percent Net New Highs for the NYSE, Nasdaq, Amex and other indices. This can determine the index with the most or least underlying strength.
Net New Highs can be smoothed with a to reduce centerline crossovers and whipsaws. Chart 3 shows the TSX Venture Composite ($CDNX) with Net New Highs for the index ($CDNL). The indicator ($CDNL) is invisible and the blue line is a 10-day SMA of Net New Highs. The green dotted lines show crosses into positive territory and the red dotted lines show crosses into negative territory. There were some pretty good signals and one whipsaw in October 2007, just before a significant peak. Also notice how the 10-day SMA of Net New Highs met resistance at the zero line three times in the first half of 2008 (blue arrows). The TSX Venture Composite ($CDNX) bottomed at the end of 2008, but the 10-day SMA of Net New Highs did not turn positive until mid May. Again, Net New Highs is a lagging indicator.
Cumulative Net New Highs can be used like the or . Net New Highs are not as volatile as Net Advances or Net Advancing Volume so the Cumulative Net New Highs line will not fluctuate as much as the AD Line or AD Volume Line. Chartists can also apply another moving average to identify upturns and downturns in the Cumulative Net New Highs line. Cumulative Net New Highs rise as long as Net New Highs are positive. Cumulative Net New Highs fall when Net New Highs turn negative. Chart 4 below shows the Nasdaq with the Cumulative Net New Highs line in red and a 10-day SMA of the indicator in blue. The price plot of the Nasdaq is overlaid as a bar chart for an easy comparison. Cumulative Net New Highs rises as long as it holds above the 10-day SMA (blue line). The market shows strength when new highs consistently outpace new lows. A move below the 10-day SMA means Cumulative Net New Highs is falling and new lows are outpacing new highs, which shows underlying weakness in the index. Chart 4 shows the downturns in red and upturns in green. Also notice that a large bearish divergence formed from July to October. Cumulative Net New Highs formed a lower high as the Nasdaq formed a higher high. New highs did not keep up with the Nasdaq at the October high and this showed underlying weakness.
Chart 5 shows Cumulative Net New Highs with its 10-day SMA for the Nasdaq. The indicator transitioned from downtrend to uptrend in 2009. Notice how the Nasdaq bottomed in early March, but Cumulative Net New Highs did not turn up until April, a month later. Moreover, notice that Cumulative Net New Highs did not accelerate higher until mid July, four months into the advance. Again, Net New Highs is a lagging indicator.
Even though Net New Highs is a lagging indicator, it can be a valuable tool in overall trend identification. Smoothing the indicator with a 10-day SMA reduces insignificant movements to focus on the general trend. The underlying index favors the bulls when the smoothed Net New Highs line is positive and the bears when negative. Armed with this information, chartists can define a trading bias when looking at other and aspects of technical analysis. An index with a bullish bias would warrant a preference for bullish signals or signals in the direction of the bigger trend. Conversely, an index with a bearish bias would warrant a preference for bearish signals.
SharpCharts users can plot Net New Highs and related indicators for six indices: the Amex, Nasdaq, NYSE, TSX Composite, TSX Venture Composite and Nasdaq-NYSE Combined. A full symbol listing is provided below. This first example shows the NY Composite in the main window with Net New Highs below in the first indicator window. The second indicator window hides Net New Highs (invisible) to focus on the 10-day SMA of Net New Highs.
Here are the steps to create the chart above.
Cumulative Net New Highs can be shown with the following steps.