The new high – new low index is a breath indicator which tracks the underlying behaviour of an index by subtracting the number of new 52 week lows from the number of new 52 week highs. By doing this we gain an insight into the underlying strength of a move in the index similar to the advance-decline line indicator and the percentage above moving average. Generally 52 week highs and lows are used given these highs or lows are interpreted as showing significant strength or weakness as well as removing the noise or false signals generated by shorter time frames.
From here use this data to calculate and track net new highs to create a cumulative indicator similar to the advance-decline line (discussed here). The calculations are very straightforward:
Net new highs = new 52-week highs – new 52-week lows
High-Low Line = Prior cumulative net new highs + current net new highs
Generally when the net highs are positive the index is seen as bullish, being that the number of new highs are greater than the number of new lows. However the degree of this strength can vary and new highs on the index should be confirmed by the indicator, the inverse of which is also true that new lows on the index should be confirmed by new lows on the indicator.
Similar to the advance-decline line the actual value of the indicator depends on the starting date and this will vary accordingly. What is important is that the high-low line’s shape and direction confirms that of the underlying index, failure to do so forms a divergence which signals the increased risk of a reversal.
The first chart below highlights the lag factor discussed above, as we can see in May 2015 the ASX200 index begins moving lower, while the new high-low line continues higher until early June before turning lower.
One criticism of this indicator is the lag factor, given it can take up to 52 weeks to reach a new high or low the index can often change direction months prior to a significant change in the high-low line. This lag leads to the high-low line not being as volatile as the advance-decline line so traders may add a moving average, such as a 10-period simple moving average to generate buy or sell signals.
The second chart below again shows the ASX200 along with a 10 period moving average added to the new high-low indicator to act as a buy signal. We can see this is generated when the new high-low line crosses above the 10-period moving average in February before the market rallies significantly. Using a short-term moving average such a 10 period average can have its own issues including noise or false signals seen on the same chart between November 2015 to January 2016. This can be dealt with using a longer period moving average however we then experience lag effects and can miss significant moves.
In summary the new high-low can be a useful indicator although it has its draw backs associated with the lag factor that can often miss significant moves in the market. Therefore it should not be relied upon as a main indicator and used with further analysis to confirm signals.
