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IBD’s New Highs List can provide individual investors with a pool of buy candidates. Stocks often reach a new high as they break out of a consolidation, such as a cup with handle, flat base, or saucer pattern.
There’s another way, though, to use the new highs/new lows data. Treat it as a secondary stock market indicator. Sometimes it can serve as a kind of a canary in the coal mine, either foretelling or confirming a correction.
“Sometimes” is the keyword here. Secondary indicators are called secondary because they don’t always work.
Let’s look at several stock-market uptrends that ran for 50 or more consecutive sessions.
September to October 2010: The stock market was sailing ahead in a confirmed uptrend. New highs were on a rampage, running sometimes as high as 350 and never dipping under 100 for more than two consecutive sessions.
But on Nov. 16, the indexes delivered fewer than 100 combined new highs (NYSE plus Nasdaq) for a third day in a row. This had not happened during the entire run of 51 sessions. This same day the Market Pulse, which is part of The Big Picture column, shifted to correction.
Here’s a tip: The exact number isn’t as important as the change in character.
What’s That Canary Doing?
December 2011 to February 2012: An uptrend that was confirmed Dec. 20, 2011, ran for 67 sessions. But the new highs/new lows data wasn’t particularly useful. The new highs tally stayed fairly low throughout the rally.
If the canary doesn’t normally chirp much, it’s hard to spot the change in character.
July to September 2012: The uptrend confirmed July 26, 2012, ran for 52 days. Once again, the new-high tally was too restrained to be useful.
December 2016 to February 2017: The uptrend confirmed Dec. 7, 2016, lasted 70 days. This rally had many days of huge new-high tallies and strayed into two digits only on isolated occasions. Yet, the new highs tally wasn’t useful in the canary role. There were times the market came under pressure, but the situation never degraded into a correction. So, the canary had no reason to turn permanently silent.
August 2017 to February 2018: On Aug. 22, 2017, a new uptrend was confirmed. The run lasted 112 sessions. The new-highs tally was in three digits throughout the run, dropping to two digits never more than two days in a row.
That changed beginning Feb. 2 this year, when new highs in two digits became common. On Feb. 8, the fifth consecutive session in two digits, the Market Pulse changed to correction.
Once again, counting chirps for an exact number isn’t the way to go. The best way is to pay attention to what’s going on in new highs and new lows. Then the investor can recognize a change in character.