Identify Market Tops and Bottoms by Doing this, Guaranteed!

Can major market tops and bottoms be identified with accuracy? Yes, they can! And I will present data that will argue that identifying “major” market bottoms is easier than any other change in market direction. Market tops can also be identified but it’s a bit more difficult than bottoms.

No one can guarantee an “exact top or bottom” but this data will pinpoint an overall change in trend. There’s plenty of time to get out of the market before a devastating fall and even more time to jump on a new up-trend after a bottom.

To support my findings, I will use extensive New High and New Low (NH-NL) data extracted from the NYSE in 2008 and 2009. This data phenomenon is not exclusive to the market bottom of 2009 as studies will show the exact, yes exact, same results can be extracted from every other major market bottom stretching back as far as the NH-NL data is available.

New High – New Low data is historically the most accurate indicator for identifying a major change in trend by highlighting extreme readings and the change in underlying market breadth.

The images contained in this article will identify the following data points:

  1. NYSE New Highs: The number of stocks making New Highs on a specific date
  2. NYSE New Lows: The number of stocks making New Lows on a specific date
  3. New High –New Low Differential: This is simply the number of stocks making new highs minus the number of stocks making new lows.
  4. NH-NL 10d Diff: This is a simple 10-day moving average representing the number of stocks making new highs minus the number of stocks making new lows.
  5. NH-NL 30d Diff: This is a simple 30-day moving average representing the number of stocks making new highs minus the number of stocks making new lows.
  6. NH-NL % Ratio: To calculate the percentage correctly, use this formula: (New Highs – New Lows) / (New Highs + New Lows) * 100 = X%
  7. NH-NL % Ratio 10d Ave: This is a simple 10-day moving average representing the percentages listed in the column terms #6 in this list

I follow the progress of stocks making new highs and new lows on the NASDAQ and NYSE and pay specific attention to turning points in the differentials and ratios. I am particularly interested in the extreme highs and lows of the readings, especially after a long trend, as they start to drop hints of an impending change of trend (positive to negative and negative to positive).

The image below shows that New Lows had dominated the market for nearly 18 months when extreme readings started to appear in October 2008. In fact, the readings in October 2008 were the most extreme that my NYSE NH-NL data contains which goes back to the early 1980’s.

010509_NHNL_wkly_18months

October 2008 NH-NL Readings for NYSE:
2008_10 - October

As the second image shows, the daily New Low readings were well above 1,000 with a peak of 2,901 on Friday, October 10, 2008. The market was screaming exhaustion as the selling pressure of the past 18 months was hitting its max. All other readings were in extreme territory including the basic NH-NL differential, the 10d & 30d differentials and the % ratio. The extreme readings continued through the end of November 2008 when they final subsided in December but remained negative.

November 2008 NH-NL Readings for NYSE:
2008_11 - November

December 2008 NH-NL Readings for NYSE:
2008_12 - December

Heading into early 2009, “blood was running in the streets” as Baron Rothschild once declared and most investors had been knocked to their knees while two of the most prestigious investment banking firms in America disappeared. The greatest value investors of all time state that the best time to buy is when this type of extreme environment occurs. The problem with that statement is that it’s based purely on fundamentals and I just can’t blindly jump-in and grab shares without some form of technical guidance. Think about that for a second, blood had been running in the street for the duration of 2008 so I suspect that many value investors were buying and saw more pain before the market decided to turn. Buyers in early to mid 2008 had to endure quite a ride before the market turned up in the spring of 2009. I prefer to catch a trend on the up-swing, not the bottom; besides, pinpointing the exact bottom is virtually impossible.

January 2009 NH-NL Readings for NYSE:
2009_01 - January

Bernard Baruch was quoted as saying: “Don’t try to buy at the bottom and sell at the top. This can’t be done–except by liars.”

January 2009 was much like December 2008 as the market remained negative. Then in February 2009, the market dropped again as the NH-NL readings started to head back towards more extreme levels. However, they didn’t reach the levels of October 2008 so this signified a “higher low” for the readings, a second clue that the market may be looking to reverse direction.

February 2009 NH-NL Readings for NYSE:
2009_02 - February

NH-NL Readings making higher lows for NYSE:
040609_NH_NL_trend change

March 2009 was the turning point. The extreme readings subsided (light red and dark red readings on my graphics) and the FIRST positive reading was registered since May 2008 (represented by “blue figures” on my graphics). On March 26, 2008, the NYSE logged a reading of 10 New Highs and 0 New lows, the first time a “0” New Low reading was logged since February 27, 2004. By contrast, the NYSE logged 11 additional days with “0” New Lows in 2009 and 20 days with “1” New Low for that same year. The year 2008 had one day with “1” New Low and the years 2005, 2006 and 2007 had zero days with “1” New Low. Amazing stats!

March 2009 NH-NL Readings for NYSE:
2009_03 - March

Aggressive trend and swing traders would have been given the green light to dip a toe into the water in late March 2009 but with tight stops. I will not speak for day traders but I would imagine that they were all over the March 2009 signals. April 2009 gave traders reason to get more aggressive on the “long side” of the market. Consistent New High readings above 100-200+ per day is my official confirmation to add shares for mid & longer term investors. However, a confirmation must be signaled before jumping “all-in” and this confirmation is triple digit New High readings. The confirmation for a mid or longer term trader is the most important indicator after a change in trend has been identified. Until this happens, a “true” up-trend is not sustainable over the long term. As you will notice, the up and down whipsawing from March 2009 to July 2009 is what a trader can expect until consistent readings in the triple digits prevail.

April 2009 NH-NL Readings for NYSE:
2009_04 - April

It wasn’t until July 2009 that this confirmation in STRENGTH (underlying breadth) took place and the market signaled that the nasty bear of 2007 and 2008 was over. Thursday, July 23, 2009 was the day the market logged its first triple digit New High reading with 108 NH’s and 2 NL’s. From there, the market was off and running as triple digit readings became commonplace and it wasn’t too long before 200, 300 and 400+ New High readings were logged (October 14, 2009 gave us 462 NH’s and 2 NL’s). By January 2010, the NYSE had its first 500+ New High reading (1/11/2010: 523 NH’s and 1 NL) in more than 3 years (December 5, 2006 was the last 500+ reading when the DJIA was trading 2,000 points higher).

July 2009 NH-NL Readings for NYSE:
2009_07 - July

I mentioned that market bottoms are easier to identify than tops and I believe this is true. However, major market tops can be identified as I clearly showed readers back in 2007 and 2008, starting with these posts:

2009_04-09_DJIA_Profits_Decline

NH-NL Ratio giving a top warning:
Two Months of Warnings

“The posts below show detailed analysis and warnings over the past two months of the current correction we are experiencing. Do NOT blame anyone but yourself if your stocks are sitting there getting slaughtered over the past couple of weeks.”

A Negative New High – New Low Ratio (NH-NL)

“To prepare, I have already sold several large positions over the past couple of weeks as noted on multiple blog posts. I have been in profit taking mode and must pay attention as a trend follower because draw-downs can be substantial if I am not careful.”

Fast forward to March 2013 (today) and we are currently in an environment where many pundits are predicting a correction or coming bear market. They may be right but why fight the trend when it clearly points higher. I don’t necessarily disagree with the so called “experts” but I will not make a move until the NH-NL ratio confirms a change in trend. As it stands now, the NH-NL data is logging positive “blue day after blue day”. Until the NH-NL breadth starts logging negative readings on a consistent basis which will in turn change my graphical readings from blue to red, I will not turn bearish. Trends tend to last longer and go further than expected so wait for confirmation.

2013_03-18_DJIA_monthly

Here is what we will need to see in the data to confirm a change in market trend has commenced:

  1. More new lows than new highs
  2. New low daily readings registering triple digit figures, consistently
  3. The NH-NL differential must turn negative
  4. The 10-d and 30-d average differentials must go negative (this is essentially the first sure sign that the market is changing direction – especially the 30-d diff.).
  5. Differential readings start registering figures larger than -300, -400, -500+.

March 2013 NH-NL Readings for NYSE:
2013_03 - March

I will be analyzing the readings and will update my followers on twitter and will certainly post an article on the blog using the graphics to show the change in trend, when it happens. Please be aware that the signals could come next week, next month or even next year (no one knows, except the NH-NL ratio).

By carefully studying the New High and New Low readings, an investor with a longer term time frame can avoid getting slaughtered during a nasty bear market – at all stages (beginning, middle and end). This same investor will also be given a green light as to when he should start adding shares after a long hibernation. If a longer term investor ONLY trades based on the major NH-NL signals, he would always outperform the markets and most likely outperform the majority of professional investors.

The same logic holds true on the positive side. The NH-NL indicator will begin to log negative or “red” graphical readings as the change in trend commences after a long up-trend. Calling a market top is not nearly as easy as calling a market bottom but the NH-NL indicators will give warnings.

Failure to employ the power of the New High New Low market breadth is failure to confidently identify a major change in trend. Don’t get caught up in the day-to-day nonsense of the financial “talking heads”, the so-called experts on twitter, on blogs or the political mind-games played by the governments and central banks of the world.

Follow market breadth, it can’t be manipulated!

Comments

  1. Chris:
    Is this 52 week new high new low or are these all time New high-new low reading?
    Thanks for sharing this valuable data.
    Thanks Raj

  2. How were these readings during aug 2011 , and other minor corrections since 2009

  3. Valid point, but I would watch the S&P vs the Dow. There is an old trick that the institutional guys use. They bid up the Dow while the escape through the S&P.

  4. Raj,

    Yes, 52-week highs.

  5. Bob,

    I watch the NYSE and NASDAQ NH-NL’s side by side in a spreadsheet, similar to the graphics uploaded in the post. Price and volume along with NH-NL will always nail the “major” trend. Smaller trends don’t apply as well.

  6. Chris,

    I actually uploaded a post in August 2011, NH-NL worked like a charm: http://www.chrisperruna.com/2011/08/07/market-overview-identifying-a-change-of-trend/

  7. Have you tried using shorter or longer durations than 52 weeks? There’s nothing special about a year, other than that people see 52-week highs/lows reported. Interesting observations!

  8. Mark,

    It’s always worked for longer term changes in trend so I have not modified the yearly setting. I would suspect that it would work on shorter time frames.

  9. Jim OConnor says:

    I have been watching new lows for a couple of decades. Glad to see more interest and creative approach. I will look at your work on new highs and the nh-nl ratio carefully but I am skeptical that combining the two ends of the distribution is more useful than watching each end separately. Appreciate the article very much. Thanks.

  10. Hi Chris:

    Very informative post – Thanks.

    Qucik question: Where are you getting the raw NH-NL data from? Are you looking @ only the NYSE or NASDAQ as well?

    Thanks.

  11. Nick,

    Pinnacle.com sells the raw data for NYSE, NASDAQ and other indexes.

  12. very interesting , thanks Chris I have always looked at NH & NL individually… not as ratio

  13. where u can download excel data

  14. Hi Chris:

    As a newbie to IBD’s philosophy, can you please help with highlighting features offered between their different products?

    Vis a Vis: Investors.com / MarketSmith / DailyGraphs and anything else? I believe you use DailyGraphs?
    Can you please shed some light on the other tools as well?

    Thank you!

  15. Hey Chris,
    Nice work! Since your data goes back to the early 80′s, i was wondering if you have used the same methods to analyze the 87 crash. Reason i ask is that even in J. Mamis “Nature of Risk” it seems that were few and very brief signals of the impending crash that lay ahead. I know you say that tops are much more difficult to identify but would your method have let you see that one coming?
    Regards,
    Michael

  16. Michael,

    Your question has inspired a follow-up blog post that I hope to upload this week. It’s amazing how the NH-NL gave clear warnings, 5 key warnings before the crash (6 weeks time to scale back or even get out completely).

  17. I use MarketSmith screening mostly. Daily Graphs no longer exists (it has become Marketsmith). I don’t use investors.com or the newspaper although I was a subscriber for many years before Daily Graphs and now Marketsmith. Marketsmith is expensive and not for everyone but I find their screens valuable.

  18. Pinnacle.com – for a fee. I have no affiliation with them – it’s where I buy my data.

  19. Hi Chris, great post! I use Stockcharts.com $NYHGH and $NYLOW indicators ( http://scharts.co/11M8r0b ), but I found differences with your data and back in time.
    Do you know why this happen? Thanks in advance..

  20. Micah Wakefield says:

    Chris, this is fascinating research, thanks for sharing. The concept as a sell-off warning seems a bit vague. Can you explain what it is you are looking for, when the markets are indicating time to get out of dodge? Is it a week’s worth of negative readings on the 30-day? Is it a combination of certain negatives from the 10d, 30d and ratio percentage? etc…

Trackbacks

  1. [...] I received a comment questioning if the 1987 Market Crash was detected by the NH-NL data following my blog post titled Nail Market Tops and Bottoms by Doing this, Guaranteed!. [...]

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