When stocks reach for a new low, investors dump it, fearing that the price will reach even lower. And that is what happens in reality. When a stock reaches for a new high, it continues to reach for newer highs till there are no more buyers to push the stock upwards. This condition is a bull market. Same when the stocks reach for new lows and more stocks follow, it is called bear market. When more stocks follow in the same direction, fear escalates into a bigger sell off.
As the market reaches its extremes, there comes a very good buying opportunity. That is, when a large percentage of stocks reach for a new low, the whole market slides downwards. Taking along with it even some of the good stocks. These good stocks become attractive and give opportunity to buy for big gains that will come up almost immediately.
How to identify such opportunities?
Plotting the New High – New Low index for the market will help us get the picture of when there is opportunity to buy or sell. This index is the total number of stocks that hit a new high for the day and number of stocks that hit a new low for the day. The total of highs is subtracted with the total of lows, we get the New High – New Low index. Which is also called the NH-NL index. More detailed study on the NH-NL index can be had from Dr. Alex Elder’s book on New High – New Low.
Having the data plotted takes a little effort, we have been plotting the same for about 850 stocks that we track. From the daily values, we sum the values for the last 5 sessions to make it a weekly value and have it plotted.
These values are taken for 3 time periods to get a better understanding. Along with 52 week High low, we also collect data for 90 days and 30 days. This chart here shows all three values as a plot. We can observe that when 30 day NH-NL reaches past 1000 (Orange line in the chart), market gives a reversal. The sections highlights with yellow are the reversals.
An even more powerful buy signal comes when there is a divergence on the NH-NL index. Points marked with Green arrows indicate where there were strong reversals.
When we have the 30 Day NH-NL move past 1000, you can begin checking charts for stocks that show strength on their prices, like having a bullish divergence on the histogram or the MACD lines. Get ready to buy when the down side move is completed. When they reverse their direction in few days they give very good profits.
As we are writing here, there is one such reversal that is in progress. And in the last 1 years we have had 9 such opportunities. Can we expect the same to repeat every year, ideally not. NH-NL nails bear market bottoms, where after a weakness, market recovers for a short period before going down again. Using NH-NL, we can identify such short term reversals and profit from it.
IN a bull market, we can use the divergences to exit our long positions before the markets slide and take away most of our gains. Regions marked in Blue on the chart were conditions where NF-NL had a divergence to the price movement. As price reached for a higher high, NH-NL reached for a lower high, giving us first signs of weakness and alert to tighten stops on long positions.
Therefore, when market reaches for the low and many stocks are giving new lows. It gives a good buying opportunity. We are not doing bottom fishing here, we are identifying strong stocks in a weak market which will help us make some quick gains.
Where can you get NH-NL charts?
We will have it published on our website by mid-march, which will be live on daily data.