New Highs - New Lows
The New Highs-New Lows indicator tries to define the market's strength by displaying the daily distinction between the number of stocks reaching new 52-week highs and the number of stocks reaching new 52-week lows. Usually smoothed with a moving average to filter out everyday changes and show longer-term trends, the indicator is used as an oscillator or discrepancy indicator.
As a rule, the New Highs-New Lows indicator approaches its extreme lows slightly before a major market bottom when used to show discrepancy. The indicator jumps up rapidly when the market turns up. It is easy to reach a new top when prices have been depressed, especially during this period because a lot of new stocks reach new tops.
While cycles develop, a discrepancy happens as fewer and fewer stocks reach new tops and the indicator decreases. Still the market indices move on to reach new highs. A classic bearish discrepancy demonstrates that the ongoing upward trend is weak and will soon reverse.
The indicator fluctuates around zero in most cases. When it is positive, the bulls are in control and when it is negative, the bears are in control. As it moves across zero trade on the indicator by selling and purchasing.