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Technical Analysis, Studies, Indicators:
New Highs and New Lows

New Highs/Lows Oscillator and Ratio

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New High/Lows Oscillator = New Highs - New Lows

and the New Highs/Lows Ratio is calculated: 

The problem with the formula above, is that on a backed with small number of stocks in most cases the oscillator value is either -100%, or 0% or +100%. This formula works well on such indexes and NYSE Composite, S&P 500. Yet it becomes difficult to apply the New Highs/Lows Ratio to Dow Jones Industrials and even Nasdaq 100 indexes. Furthermore the simplified formula which uses an absolute value instead of percentage value could be used: 

Chart 1: S&P 500 index - New Highs and New Lows indicators.

Investors and technical analysts study New Highs/Lows indicators to see whether they are confirming or diverging from the underlying price movement. When the underlying index (basket of stocks) price moving average rises and the number of 52-week Highs increases (New High/Lows oscillator and ratio move up) then investors consider that the New Highs confirm the bullish market. Vice versa, during the down trend, the increasing number of New Lows would confirm the bearish trend.

Chart 2: S&P 500 index - trading New Highs and New Lows Ratio.

The divergence in between the price trend and the New Highs & New Lows movement could signal a possible change in the market sentiment and as a result may lead to the changes in a trend direction. For instance, a scenario when during an up-trend the number of New Highs started to decline (New Highs/Lows oscillator and ratio starts to move down) may signal a possibility of coming down-turn. At the same time, a situation when during the decline the number of New lows starts to decline (New Highs/Lows oscillator and ratio starts to move up) may signal a possibility of coming recovery.

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