THE HAndbook of TECHnICAl AnAlysIsnew high–new Low indicators
Figure 22.8 is a chart of a New High–New Low Line, or Net New Highs Line,
which tracks the running total of the daily HL difference, that is, (H−L). We
observe that this breadth indicator provided an early warning of the 2008
market top as its trendline was breached much sooner than the corresponding
trendline on the Nasdaq itself. We also see an extreme oversold level created
exactly at the bottom of the market in the daily Net New Highs, which was
a bullish indication. A ratio‐adjusted version would also account for any in-
crease in the volume of issues at the exchange. Again, as with most breadth
lines, that is, indicators that track the daily running total, we only observe
its direction, shape, and any divergences with the market. We disregard its
absolute readings. Also, it is best to observe the breadth lines over the longer
time horizons as these indicators respond more slowly to market action. For
breadth lines, the direction of the line is an important factor in gauging the
general trend of the market. We see that the New High–New Low Line indicat-
ed a declining market by pointing to the downside at Point X. Although prices
were stalling at the corresponding X point, the breadth indicator was decisive
and clear with respect to the direction of the trend. If any divergence should
manifest on the charts between a breadth line and the market, the practitioner
would be wise not to disregard it.
figure 22.8 Divergences between the NYSE Index and the McClellan Summation
Index.
Courtesy of Stockcharts.com