The New Year started by giving the market the third lowest NH-NL Ratio rating since the start of 2007 with an adjusted average of -83%. Only the weeks ending on Saturday, November 24, 2007 (-84%) and Saturday, August 18, 2007 (-87% - the lowest in more than 5 years) were weaker. In contrast, 2006 ended on a positive note and extended its run with a decent opening in 2007; the prior New Year (05-06) did much of the same. (Complete NH-NL Data is at the bottom of this post)

We have not had a bullish reading (as noted in the legend on the chart – click for full view) since the week ending on Saturday, June 2, 2007. Last year (2007) ended with only half as many “very bullish” weeks as we witnessed in 2006.

*click the image for a larger view*

New lows topped 3,000 for the first time in many years during the week ending Saturday, November 10, 2007. This is the first reading of this type that I can find dating back to the 2002 data that I have stored on my computer.

The market gave us exactly 1,000 new lows last Friday, only the third time we reached or topped this number over the past couple of years.

So, what does all this confusing NH-NL Ratio data mean?

Well, the data of the past has actually guided us in and out of the market while it was trending but I have also noticed how the extremes have come precisely when the market is looking to reverse and move in the opposite direction. We have been getting many extremes over the past few weeks and months (including last Friday).

Are the current extreme levels telling us that this market has a bounce coming?

According to the charts, it does. We should see some type of a bounce considering that the NASDAQ reversed nicely to close the day Wednesday and the fact that other indicators are pointing for a reversal as well. The NASDAQ is at the lower end of its Bollinger Bands as shown on a chart below (the green band).

The market bottomed the last time I made a significant post about the NH-NL Ratio on August, 21, 2007 is a thread titled: New High New Low Ratio Sets New Low

Historical chart (1968-2007) here for the Lowest Hi-Low Differential in Nine Years

Read more »

We witnessed our second major distribution day as the DOW was down 2.6% on volume 40% larger than the prior trading day. The NASDAQ was down 2.6% on volume 15% larger than Thursday.

It was the worst selloff for the NASDAQ since February and the largest for the DOW since August. Volume surged across all major indexes but do keep in mind that it was options expiration day.

Technically speaking, we now have 4 distribution days for the NASDAQ and 3 for the DOW over the past month. It’s now time to start focusing big-time on the market leaders to see where they are going to take this market. If they start to roll over, you better be quick to take profits and even quicker to take losses.

Here’s what I had to say last Thursday, October 11, 2007 (see the charts in this link as well: Distribution Day)

The number of stocks above their 50-day moving averages crossed above the overbought level of 80 last week and we saw our first major sell-off distribution day yesterday. This doesn’t mean you must rush today to sell all of your holdings but do understand that the next sell-off is not far from happening. Study the chart below and follow the purple line to see where and when the market had peaks and valleys as related to the number of stocks on the S&P 500 above or below their respective 50-day moving averages.

The markets flashed a heavy distribution day Thursday as the NASDAQ was down 1.4% on volume 60% larger than the previous day. This was the largest showing of volume in two months and is not healthy because it was pure distribution. It was only the second distribution day over the past month so we can’t call this a bear run but please be on the lookout for a possible correction of 5%-10%. Technology stocks led the decline as BIDU gave back 10% of its amazing run.

Tonight’s chart comes to us from Carl Swenlin, the President at Decision Point

I want to thank Carl for allowing me to upload the chart that shows the 10-day moving average of the Hi Lo Differential. Another thanks to Mike for leaving me the comment to contact Carl.

*click the image for a larger view*
*Note: I added the “1,2,3″ graphics from photoshop*

According to Carl’s data, we must go back to 1998 to find a lower reading than last week’s NH-NL ratio. Even more amazing is the fact that we must then go back 20 to 38 years to find readings in the same vicinity as 1998 and 2007.

Ignoring the spike in 1987, we must visit the 1970’s to find readings below the -400 level on the chart.

*click the image for a larger view*
*Note: Original Chart*

And don’t forget to stop by Carl’s site, Decisionpoint.com

The markets gave us 2,952 new lows last week, surpassing the previous multi-year weekly low of 2,862 set in the final week of July 2007. The NH-NL ratio dropped to its worst level in more than five years with a weekly reading of minus 86.89%.

Last week averaged 41 new highs per day and 590 new lows per day with the ultimate apex coming on Thursday with a daily reading of 33-1,276. I can’t even find a reading of minus 94.96% in my data which stretches back to the post bubble days. Thursday is now the weakest reading my data has ever recorded (keep in mind that I started to store this data in excel back in 2001 so I am sure it is not the worst ever or even the worst reading over the past 10 or 20 years).

See a Historical chart (1968-2007) here for the Lowest Hi-Low Differential in Nine Years

*click the image for a larger view*

The past four weeks have compiled new lows of 2,862, 2,646, 2,095, and 2,952 for a monthly average of 2,639; comparatively, May had an average of 450 or one sixth the number of stocks making new lows over the past month.

We recorded our first reading of more than 1,000 new lows on Monday August 6, 2007 after writing this very popular post:
A Negative New High - New Low Ratio (NH-NL)

The NH-NL Ratio remained in negative territory for nine of thirteen weeks in the spring and summer of 2006 while the NASDAQ corrected from 2,300 to 2,000. If that is any indication of what the market wants to do now, be prepared to watch the market tread sideways to slightly lower over the next few months. Yes, the Fed is screwing with the natural progression of the market by bailing out Wall Street’s mistakes but all things reach their equilibrium sooner or later.

So what does this all mean?
As I said in my last NH-NL Ratio post:

It means that the market should be ready to correct by “another” 10% based on the history of my NH-NL studies.

In addition to watching the NH-NL Ratio, I keep an ongoing database with the movements of the 197 industry groups tracked by Investor’s Business Daily. Unfortunately, I can’t reproduce that proprietary information here as they will be sending me e-mails warning me to take it down as it is for subscribers only (it has happened before). However, I can list the general industries that are gaining and losing steam over the past couple of weeks as this information can be compiled anywhere on the web.

The industries on the move happen to be retailers with emphasis on:

• Consumer Electronics
• Drug Stores
• Super Markets
• Wholesale Food

Aside from Retailers, Banks are also on the rise since the Fed made their move.

Read more »

I told everyone “Don’t Believe the Hype” after Monday’s market and this thinking may be coming to fruition. I don’t want to jump the gun on any predictions but that blog post stirred up more interest than any post I have ever written.

Today’s IBD “Big Picture” Section reads:
“Credit Crunch Fuels Sell-Off, Casts Doubt On Rally”

They mention that the rally, which was confirmed earlier in the week, is now skating on thin ice and is under pressure. To me, the follow-through was already on thin ice based on Monday’s NH-NL ratio; it has now cracked and may be falling through.

Anyway, enough of the shots at IBD because I still view it as one of the best stock market papers on the newsstand.

The NH-NL ratio currently sits at 168-524 or a negative 51.43% for the week (a stronger reading than the past two weeks).

Here is a look at the past three weeks:
07/28/07: 142-572, -60.34%
08/04/07: 85-529, -72.43%
08/11/07: 168-524, -51.43% (not including Friday)

For the complete list, please see this post: NH-NL Ratio.

What a difference a day makes for Headlines (The Media are Sheep):

Looking at the action on the NASDAQ and DOW, we can see how the indices are struggling to recover the 50-day moving average while bouncing above the 200-day moving average.

This type of action is clearly an indicator of buyers and sellers struggling to gain the upper hand. I won’t be the one to predict which group will win but I can tell you that I currently hold two long positions and one short position heading into tomorrow. So I guess I am playing both sides of the fence. I like my short heading into morning trading.

Either way, continue to monitor the recent market leaders and take the trades based on the setups and try not to form an opinion of where you THINK the market is headed. Just follow the market in the direction it wants to take. Sounds simple enough, now execute!