Friday, April 27, 2007

New Highs and New Lows in the Stock Market

You know, when you've been in the business long enough, you become quite a skeptic. When it looks as though the world is going to hell in a handbasket (as in late February and early March) and put/call ratios are going through the roof, you start to wonder if things are really as bad as they seem. Similarly, when all the financial publications are mesmerized by round numbers and trumpeting Dow 13000 and S&P 1500, you begin to reflect if things are actually all that good.

To be sure, my money flow figures for the Dow, summarized daily on the Weblog, have been looking strong. Still, as the chart above notes, there's an unsettling piece of divergence in the new high/new low data that is worth keeping an eye on.

We're looking at the number of stocks in the broad market (NYSE, AMEX, NASDAQ) that are making fresh 20 day highs (pink line) and those making 20 day lows (yellow line). Normally, you'd expect new highs to rise when the S&P 500 Index (SPY; blue line) goes up and new lows to decline. This doesn't always happen, however. The S&P Index is a weighted index of blue chips. It can rise or fall to new price extremes without taking the broad market with it. It's during those periods of divergence that we frequently see reversals of trend.

Notice, for example, that new highs tailed off and new lows moved higher, even as SPY hit new highs in late February. New lows also dried up during mid March prior to the market rally.

Of late, we've seen continued price highs in SPY, but over the past two weeks the new highs have not participated and new lows have crept higher. For now, I'm considering that a yellow light. Should we start to see continued divergence in the new highs/lows accompanied by subnormal dollar volume flows into institutional favorites, I would be more inclined to look for a significant market correction.

In my next post, I'll take a sector by sector look at dollar volume flows and see what they're saying about the current market.

7 comments:

The Dude said...

Hi!

I love your website, I'm new to trading, and it's taken me days following links going through your articles. Your linking is wonderful. I have it on my startup list of websites to look at before the market opens everyday.

You final line of this post was "In my next post, I'll take a sector by sector look at dollar volume flows and see what they're saying about the current market."

I read books by Tony Oz and Tony Turner, both say to watch this, but they say it's hard to find. If you have time, in your post, can you explain how you find and track this dollar flow?

Thanks!!!
Matt (Chicago, IL)

Michael said...

"You know, when you've been in the business long enough, you become quite a skeptic."

You can say that again! Sometimes I think I'm too skeptical for my own good.

S said...

Dr. Brett,

You must know that your site has far more advanced substantive data than any other I have encountered on short term trading. A lot of my own research concurs with yours. Often times I find myself wishing that you wouldn't share your findings as it just seems a free give-away to people who haven't done any homework. Also, imagine what would happen to the value of tick derived indicators if everybody starting utilizing them? I suppose I can take solace in the fact that most people will never act on this information.

Brett Steenbarger, Ph.D. said...

Hi Matt,

Thanks for the generous comment. I think if you do a Technorati advanced search and look for all posts with the words "dollar volume flow" in the blog, you'll see how the idea has evolved. I'll also include links in my upcoming articles.

Brett

Brett Steenbarger, Ph.D. said...

Hi Michael,

It *can* be confusing, especially when you become skeptical of contrarian views... :-)

Brett

Brett Steenbarger, Ph.D. said...

Hi S.,

I really appreciate your comment, but I think you give me too much credit. Professional traders are already acting upon these ideas. It's only in the retail trading world where they might seem novel.

Brett

weightoftheevidence said...

Brett:
Along with the Highs failing ... there is negative breasth in the majority of the last 10 days on both NYSE and NASDAQ ... while both indexes have headed higher.

I track 20,50,65,100,52 week highs/lows in EXCEL from Barchart as well as feed realtime data to Excel so I can track the same for the NASDAQ 100, Sp500, Russell 2000 (for obvious futures reasons). My Prophetx from DTN was chosen because is give me realtime a put/call ratio as well as net realtime advance/decline numbers for NYSE, SPX, NASDAQ, NASDAQ100, SP500 and RUSSELL2000.

What datafeed do you use to feed your Excel? Maybe a summary of you tech setup placed somewhere on your site would keep questions like this from repeating.

Thanks.
Doug (Palm Beach)