The brand new excessive/new low ratio (NH-NL) ratio has been round for a few years however completely different traders use this indicator in numerous methods. Some traders plot the ratio on a chart utilizing the quantity zero as a impartial designation with constructive numbers equaling extra new highs than new lows and a unfavourable quantity equaling extra new lows than new highs based mostly on a specified time period. I’ve developed and used the NH-NL ratio in a totally completely different approach from a number of the extra fashionable strategies. I began to observe shares making new highs whereas studying the paper Investor’s Enterprise Every day a few years in the past. I did not use the information highs as an indicator however I solely studied shares to purchase from the checklist. As I grew to become a extra skilled investor, I subconsciously began to gauge the market whereas noting if the brand new highs had been growing or reducing. After the stock market bubble burst in 2000, I began to document the distinction between the each day new highs and the each day new lows. I’d enter them into an excel sheet together with the value and quantity of the foremost market indices and research their relationship. Inside two years, I used to be satisfied that the foremost market tops and bottoms may very well be positioned simply by aggressively finding out the value and quantity of the foremost indices and finding out the ups and downs of the NH-NL ratio. The final market indices usually give traders false strikes in all instructions and lots of market companies and traders have developed new indicators to assist assess the market to try to pinpoint turning factors with out nice success. Many of those secondary indicators are profitable in displaying the investor if the market is weak or robust however they fail to pinpoint the energy or weak spot of a turning level with nice accuracy. Many of those secondary indicators give false alerts together with the final market indices.
With a number of years of significant research below my belt utilizing my technique of the NH-NL ratio, I’ve precisely protected my cash throughout downturns and have precisely guided my buys when the market has reversed and began a brand new sustained up-trend (not a head pretend).
How do I take advantage of my NH-NL ratio?
I begin by recording the each day new highs and new lows from Traders Enterprise Every day (my desire) however you may use any free or paid service on the net. Over the previous 5 years, I’ve developed key ranges that the market should reached or violate to set off sure actions. I’m not pulling any of those numbers from skinny air as they’re all based mostly on precise expertise and haven’t been derived from again testing. For a market to persuade me that it’s following by way of and is beginning a brand new up-trend, it should current me with a minimal of 500 new highs per day on a constant foundation. When every week ends, I add the weekly NH-NL totals and divide by the variety of lively buying and selling days to get the weekly common. The common should have a minimal of 500 shares per day for me to think about risking over 50% of my money in new positions (the brand new leaders). As soon as the weekly averages attain 800-1,000+ shares per day, we all know that the market…is in a full fledged rally and you can begin to commit your total buying and selling stake and use margin. In 2003, the market gave quite a few cases when the brand new highs topped 1,000-1,200 shares per day, a really spectacular quantity. When the market reveals energy like this, the development has turn into apparent and you could have your cash working for you by following the development. Remember the fact that 75% of all listed shares will observe the final development of the market.
Not too long ago in September and October of 2005, the NH-NL ratio has been unfavourable, which means that we’re seeing extra new lows than new highs. When the sort of motion occurs, you could lock in income and transfer your money to the sidelines. It isn’t secure to speculate on the lengthy aspect of the market when the ratio is unfavourable. Typically instances, a bear market could also be forming when the ratio weakens and turns unfavourable. If the market confirms a bear market or down-trend, it may be an opportune time to make cash shorting shares or utilizing superior methods with choices (I solely suggest this for superior and skilled merchants). You need to decide f the market is in a down-trend or whether it is buying and selling sideways. Whether it is buying and selling sideways, it is going to be higher to drag your money to the sidelines and await a path to type (both up or down). This text is being written and printed on October 25, 2005, the primary day after the NH-NL ratio has turned again to the constructive aspect after 13 consecutive days of a unfavourable ratio. The previous two weeks have averaged unfavourable ratios with some days solely reaching 15 high quality new excessive shares. Any such weak motion may sign a backside available in the market as we get able to type a brand new rally. Essentially the most essential indicator to look at over the following few weeks would be the NH-NL ratio to see if it may proceed to realize energy and improve the brand new highs to 500 or extra shares per day. If this occurs, the present indication {that a} rally has shaped on the foremost indices shall be confirmed and you can begin to commit greater than 50% of your buying and selling stake to new leaders breaking out of sound bases or shares shifting greater from set up assist areas.
As I look again at my archived onerous copies of IBD, I can see the energy and weak spot that this ratio gave us all through 2002 and 2003. I’m reminded how the ratio went from unfavourable territory in September of 2002 to a constructive ratio in October of 2002. After reaching constructive territory, the brand new excessive ratio soared into the 800-1,100 vary within the first six months of 2003 as we had been in a powerful bull market, the strongest yr for the reason that bubble burst. I do not know what subsequent month or subsequent yr holds for traders, however you may get a good suggestion by monitoring this indicator because it turns again to the constructive aspect after a really poor October (2005). I as soon as wrote in regards to the Halloween indicator and I’m now satisfied that it has some validity, particularly if this NH-NL ratio confirms one other rally as October attracts to an in depth.
