Caps NH-NL Index

Worked on a new big picture indicator, the Caps NH-NL. It was Dr. Alex Elder’s new development on the existing NH-NL index.

The idea behind this concept was that, when new high’s or lows come in the market, are they coming from big stocks? If they are, then the commitment on the direction of the market is high or low according to the prevailing trend.

For example, when the total market cap of all the stocks that give a new is bigger than the total market cap of stocks that are giving new lows. This means, bigger stocks are contributing to the market on its upward journey.

Large money is chasing the market upwards, we can continue to look for buying opportunities. If it is the opposite, then should sell the market.

There are divergences which are even more powerful signals. When the market is going up, New highs are slowing down and the market cap of those stocks that are coming to high’s are lesser, we get a divergence on the index. It gives us an early signal that, the market is getting weak on the upside.

Need to get cautious on the long position, look for exits and prepare to build short positions.

As I am writing this article, we have a market that is showing multiple divergences on the NH-NL indicators. Primary NH-NL indicators on shorter time frames are having multiple bearish divergences, and along with the Caps NH-NL is also diverging.

When a bunch of market tools show a signal, it is a hard warning for the market participants, to get cautious.

It is my observation as also of other long term players in the market, at the times when there is warning signals coming in the market, that is the time when the whole market is gung-ho about it. Like what we have now, it is getting euphoric. Probably attracting more people to lose.

Here is the index of Caps NH-NL done up to 24th July 2020.