High-Low Index
The 10-day moving average of the Record High Percent Index, which is a breadth indicator (see below).
Record High Percent, which is based on new 52-week highs and lows, serves as the basis for the High-Low Index, a breadth indicator. New highs divided by new highs + new lows is the Record High Percent. A smoothed version of the Record High Percent, the High-Low Index is just a 10-day SMA of the Record High Percent. This article will describe how to determine the High-Low Index’s direction and how to define a trading bias using the absolute level.
Calculating the High-Low Index
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Record High Percent = {New Highs / (New Highs + New Lows)} x 100
High-Low Index = 10-day SMA of Record High Percent
Spreadsheet 1
The table above shows some possibilities for Record High Percent. As the formula implies, Record High Percent shows the number of new highs relative to the total (new highs plus new lows). The total is multiplied by 100 to generate round numbers that fluctuate between 0 and 100. The table above shows various possibilities based on an index with 100 stocks, such as the Nasdaq 100 or S&P 100. Rarely, if ever, will 100% of stocks record a new high or new low. Readings below 50 indicate that there were more new lows than new highs. Readings above 50 indicate that there were more new highs than new lows. 0 indicates there were zero new highs (0% new highs). 100 indicates that there was at least 1 new high and no new lows (100% new highs). 50 indicates that new highs and new lows were equal (50% new highs).
High-Low Index – Chart 1
Record High Percent is smoothed by the High-Low Index using a 10-day SMA. The first indicator window’s Record High Percent (black line) and the second indicator window’s High-Low Index (red line) are displayed in Chart 1 above. The S&P 100 Record High Percent ($OEXHILO) smoothes the S&P 100 Record High Percent ($RHOEX), as can be seen, particularly in the yellow area during May and June of 2010. While the High-Low Index trended higher in June and lower in May, the Record High Percent swung back and forth between 0 and 100 multiple times.
Interpreting the High-Low Index
When the High-Low Index is above 50, meaning that new highs exceed new lows, a stock index is generally considered strong (bullish). On the other hand, when the High-Low Index falls below 50, indicating that new lows exceed new highs, the stock index is considered weak (bearish). When there is a significant uptrend or decline in the underlying index, this indicator may go to its extremes and stay close to them. Strong upward trends are typically accompanied by readings that are continuously above 70. Strong downward trends are typically accompanied with readings that are continuously below 30.
Direction Identification
The directional movement of The High-Low Index shows when new highs are expanding or contracting, which in turns reflects underlying strength or weakness in the index. Chartists can define direction by applying a moving average to the High-Low Index. Chart 2 shows the NY Composite with the NYSE High-Low Index ($NYHILO) and its 20-day SMA. The High-Low Index turns up when it moves above the 20-day SMA and turns down when it moves below the 20-day SMA. New highs are increasing and/or new lows are decreasing when the High-Low Index rises. New highs are decreasing and/or new lows are increasing when the High-Low Index falls.
High-Low Index – Chart 2
The green dotted lines show the High-Low Index turning up and moving above its 20-day SMA, which is positive for the NY Composite. The red dotted lines show the High-Low Index moving below its 20-day SMA, which is negative for the NY Composite. Because the bigger trend was down from October 2007 to March 2009, the bearish signals worked much better than the bullish signals.
Bull-Bear Bias
Strength or weakness in new highs can also be determined using the High-Low Index’s absolute level, which in turn indicates the index’s underlying strength or weakness. The High-Low Index can occasionally be somewhat erratic, but it always stays above or below its midpoint (50). Keep in mind that when you are over 50, new highs outnumber new lows, and when you are under 50, new lows outnumber new highs. For the underlying index, this level clearly indicates a bullish or bearish tilt.
High-Low Index – Chart 3
The Nasdaq’s 20-day SMA and High-Low Index are displayed in Chart 3. Between June and August 2007 and November 2007 and February 2008, the index made numerous moves above and below its 20-day SMA. Many whipsaws would have been produced if these crossovers had been played. Alternatively, chartists might examine the High-Low Index’s overall level. Take note of how the High-Low Index dropped below 50 at the end of May and stayed there for three months, until late August. The High-Low Index stayed above 50 until early March (7 months) after crossing over 50. But not all signals will endure this long.
With a bullish or bearish bias in hand, chartists can use other technical analysis components to produce signals that match. When the High-Low Index is above 50, chartists can dismiss negative signs and concentrate on bullish ones. In a bullish market, one can use oversold readings, resistance breakouts, or bullish moving average crossings. When the High-Low Index falls below 50, chartists might overlook optimistic signs and concentrate on negative ones. In a negative environment, one can employ bearish moving average crossovers, overbought readings, and support breaks.
A Lagging Indicator
New 52-week highs and new 52-week lows are considered lagging indicators. In other words, the market will change direction before there is a significant shift in the number of new 52-week highs or the number of new 52-week lows. Think about it. It takes at least 52 weeks to forge a new high or a new low. Therefore, an extended move is required for a stock to forge a new high or a new low. There are plenty of new highs after an extended advance, just as there are plenty of new lows after an extended decline. New highs dry up when a stock index corrects after an extended advance. Some new lows will surface during a correction, but it takes an extended decline to generate a serious increase in new lows. Similarly, new lows dry up when a stock index bounces after an extended decline. Some new highs may surface during this bounce, but it takes an extended advance to generate a serious increase in new highs..
The Bottom Line
The High-Low Index, like its relative the Record High Percent, is a breadth measure that is unique to an underlying index. Stocks in the Nasdaq 100 are included in the Nasdaq 100 High-Low Index, stocks in the NY Composite are included in the NYSE High-Low Index, and so forth. The High-Low Index is not intended to be used as a stand-alone indication, just like any other indicator. It ought to be applied in combination with other technical analysis facets.
SharpCharts
Sharp Charts users can plot the High-Low Index for eight indices, including the S&P 500, TSX Composite and Dow (see list below). It is often helpful to plot the underlying index along with the indicator for easy reference. The High-Low Index can be plotted in an indicator window or in the main chart window. It can even be plotted behind the price plot of the underlying index. In this example, the index is shown in the main window with corresponding High-Low Index plotted behind the index and in the indicator window. First, enter the index symbol in the “Symbol” box in the upper left. Second, go to “Indicators” and select “Price.” Third, enter the symbol for the Record High Percent in the “Parameters” box. Fourth, select “Above, Below or Behind” for the “Position” of the indicator plot. A moving average can be added by choosing “Advanced Options” and selecting an “Overlay.”
High-Low Index – Chart 4
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