How To Insert A Cover Page Using The Sideline Style Predict Stock Market Tops and Bottoms With The NH-NL Ratio

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Predict Stock Market Tops and Bottoms With The NH-NL Ratio

The New High/New Low (NH-NL) ratio has been around for many years, but different investors use this indicator in different ways. Some investors plot the ratio on a chart using the number zero as a neutral designation with positive numbers equaling more new highs than new lows and a negative number equaling more new lows than new highs over a specified time period. I developed and used the NH-NL relationship in a completely different way than some of the more popular methods. I started following stocks making new highs while reading the Investor’s Business Daily newspaper many years ago. I didn’t use news highs as an indicator, but only studied stocks to buy on the list. As I became a more experienced investor, I began unconsciously gauging the market as I looked to see if new highs were rising or falling. After the stock market bubble burst in 2000, I started recording the difference between new daily highs and new daily lows. I would enter them into an Excel sheet along with the price and volume of the main market indexes and study their relationship. Within two years, I was convinced that the major highs and lows of the market could be easily located by aggressively studying the price and volume of the major indices and studying the ups and downs of the NH-NL ratio. General market indices often give investors false moves in all directions and many market and investment services have developed new indicators to help evaluate the market to try to identify turning points without great success. Many of these secondary indicators are successful in showing the investor whether the market is weak or strong, but fail to pinpoint the strength or weakness of a turning point with great accuracy. Many of these secondary indicators give false signals along with the general market indices.

With several years of serious study under my belt using my NH-NL ratio method, I have accurately protected my money during recessions and accurately guided my purchases when the market reversed and started a new sustained uptrend (not a head ). false).

How do I use my NH-NL relationship?

I start by logging new daily highs and new lows from Investors Business Daily (my preference), but you can use any free or paid service on the web. Over the past five years, I have developed key levels that the market must reach or breach in order to trigger certain actions. I’m not pulling any of these numbers out of thin air, as they’re all based on actual experience and not derived from back-testing. For a market to convince me that it is continuing and starting a new uptrend, it must present me with a minimum of 500 new highs per day consistently. When a week ends, I add the weekly NH-NL totals and divide by the number of active trading days to get the weekly average. The average must have a minimum of 500 shares per day for me to consider risking more than 50% of my money on new positions (the new leaders). Once the weekly averages reach more than 800-1000 shares per day, we know that the market is in full recovery and you can start to commit all your trading participation and use the margin. In 2003, the market saw numerous instances where new highs exceeded 1,000-1,200 shares per day, a very impressive amount. When the market shows strength like this, the trend has become apparent and you should have your money working for you by following the trend. Note that 75% of all traded stocks will follow the general market trend.

As recently as September and October 2005, the NH-NL ratio was negative, meaning we are seeing more new lows than new highs. When this kind of action happens, you should lock in the profits and move your money to the margin. It is not safe to invest on the long side of the market when the ratio is negative. Often, a bear market may be forming when the relationship weakens and turns negative. If the market confirms a bear market or a downtrend, it can be an opportune time to make money by shorting stocks or using advanced options strategies (I recommend this only for advanced and experienced traders). You need to determine if the market is in a downtrend or trading sideways. If you are trading sideways, it is better to throw the money aside and wait for a direction to form (either up or down). This article is being written and published on October 25, 2005, the first day after the NH-NL relationship turned positive after 13 consecutive days with a negative relationship. The last two weeks have averaged negative ratios, some days reaching only 15 new quality stocks. This kind of weak action could signal a bottom in the market as we prepare to form a new rally. The most crucial indicator to watch over the coming weeks will be the NH-NL ratio to see if it can continue to gain strength and push to new highs of 500 or more shares per day. If this happens, the current indication that a rally has formed in the major indices will be confirmed and you may start committing more than 50% of your trading holdings to new leaders breaking out of strong bases or the stock rising from established support areas.

As I look back at my archived hard copies of IBD, I can see the strength and weakness this ratio gave us throughout 2002 and 2003. It reminds me of how the ratio went from negative territory in September 2002 to a positive relationship in October 2003. .2002 After reaching positive territory, the new high ratio shot up to the 800-1,100 range in the first six months of 2003 as we were in a strong bull market, the strongest year since the bubble burst. I don’t know what’s in store for investors next month or next year, but you can get a good idea by tracking this indicator as it bounces back to the positive side after a very poor October 2005. I once wrote about the Halloween indicator and now I am convinced that it has some validity, especially if this NH-NL relationship confirms another rally as October comes to an end.

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