Chart Last Updated: September 28 2023
The number of stocks reaching a new 52-week high relative to the number of stocks falling to a new 52-week low is a measure of the market's breadth. In a healthy market an increasing number of stocks will make a new high as the market climbs. In the late stages of a bull market the advance "narrows", meaning fewer issues reach new highs along with the major indexes. Similarly, the end of a bear market is evident when the number of new lows decreases even as the market declines.
How to use the New High Low Ratio:
The two indicators on this chart illustrate the strength of the market's trend as measured by the number for new highs and lows.
The top indicator is the "New High Low Ratio" which combines the 10-day and 21 day moving average of the ratio of the number of 52-weeks highs to the sum of the number of 52-week highs and lows.
The formula is: 10-day (Red) and 21 day moving average (New Highs) / (New Highs + New Lows)
This indicator is not an overbought/oversold oscillator.
The trend of the indicator can be used as a bullish or bearish indicator. When the value is above 70% it is considered bullish and very bullish over 85%. When it is under 30% it is considered bearish and very bearish under 20%.
Significant market downtrends will often begin or accelerate when the indicators cross from above the 70% level to below the 70% level. Likewise market uptrends will often begin or accelerate when this indicator crosses from below the 30% level to above it. The 50% level on the 21 day moving average ( black ) is useful for longer term trend confirmation.
The Absolute Number of New 52-week Highs and Lows:
The second indicator displays the absolute number of new highs in green, and new lows in red.
The absolute number of new highs and lows should be used as a confirmation of the trend indication of the New High Low Ratio.
Because the ratio indicator is a percentage value calculated based on a denominator (total number of both new highs and lows) that can vary greatly in amount, it is important to also consider the absolute number of new high and lows.
For example, if the market has 20 new highs and 5 new lows the indicator will be 80%. This is the same ratio you'd have if there were 200 new highs and 50 new lows. In our markets of thousands of stocks, the ratio has more significance when there is a higher absolute number in the numerator. In this case, 200 new highs is a much stronger market than one with 20 new highs, even if the ratio indicator would result in the same 80% value.
As a general rule of thumb, a strong trend up or down will maintain a level of at least 100 new highs or lows respectively. You will see a thin blue line demarking these levels on the chart.
In practice, the ratio will initially turn up from a bearish condition and rise above the 30% level without achieving the 100 new highs level, but if it is a good trend, the level should eventually exceed 100 new highs
The Hindenburg Omen looks at the ratio of new 52-week highs and 52-week lows occurring in an uptrend in an attempt to determine the probability of a market crash or correction. Individual occurrences may not signal much but repeated occurrences can signal an increased likelihood of a correction. This indicator looks at the frequency of these occurrences over a 30-day moving period (light blue) and a 90-day moving period (dark blue). Higher values indicate a higher probability of a crash or correction.