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FRED GOODMAN'S KEY INDICATORS FOR
INVESTMENT SUCCESS
There are very few indicators that have been studied as long as the new highs/new lows indicator. It is a simple 10-day moving average of the net difference between the number of 52-week new highs and new lows. Currently there are over 300 more new highs than new lows on a daily basis, and the 10-day average is 238. While it is simple in its construction, it is actually complex in interpretation, because of the way new highs and new lows are determined. Because a new high is the highest price a stock has reached in 52 weeks, unlike in the old days when they were determined on a year-to-date basis, the ease of making a new high or a new low is dependent upon whether we are in a bull or a bear market. During the first year of a bear market, a modest rally will produce a lot of new highs because you are comparing both to a period of rising and to a period of falling prices. After a full year in a bear market the price a stock much reach to make a new high is a lot higher, and it doesn't start to decrease until the market bottoms out. I have placed pink markers at May 23 for each of the 8 years covered in the chart below, to give you a reference to the annual change in the price. During the last year the market fell for the first 4 months and was volatile but flat for the last 8, so it is becoming easier to produce new highs with every passing day. As the summer wears on it will become still easier for the net new highs to increase, so if it does not increase, the indicator should be considered negatively. The reverse is also true, in a rising market it becomes more and more difficult to establish new highs, so when the net new highs decreased sharply in early 1998, many traders started to expect the worst. However, it took another 2 years for the market to turn. The indicator also serves an intermediate-term purpose. Note that the market slowed its advance or declined in virtually every instance after the net new highs turned down from a high above 200. Note also, that the market turned up with the indicator, after it made a low below -200. This is especially interesting right now because the net new highs has reached its highest level since 1998. When it turns down, yet another market negative will be in place. The next two charts show the indicator in more detail.
Notice that each time the indicator climbed above 200 there followed a decline when it turned down again, and each time it dropped below -200 there followed a rally when it recovered.
In the last few years, each excursion to 200 was followed by the resumption of the decline.
Fred Goodman, CFP, is a fee-only Certified Financial Planner based in Los Angeles. You can send him your questions and comments via email at Fred@MarketMonograph.com. The charts and commentary represent what Fred is thinking about the market and thinking of doing for his own account and for accounts he manages. There is no guarantee that you will profit from trading as discussed herein. You may lose money and Fred assumes no responsibility for what you do or do not do with this information. 
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