One of the most basic and easy to use breadth indicators is comparing 52 Week New Highs to 52 Week New Lows in any of the indexes. If you’re trading breakouts and you want to have a higher win rate, commons sense says you should trade when more stocks are making 52 week highs than lows. The formula is pretty straight forward: 52 Week New Highs - 52 Week New Lows.
Using Stockcharts.com you can chart the 1 day moving average and 10 day exponential moving average against their pre-built New High/New Low indexes ($NAHL in this example). When the 1 day crosses above the 10 day you get a bull signal and when it crosses below the 10 day you get a bear signal. Looking at the chart, Bullish signals were July 2011 and then September of 2010. We received two bear signals in June and July just before the market went into a corrective phase.
I’ve charted three years of data but watching the last 12 months will give you a clearer picture of the cross over points.
By following this indicator you can move into the market as stocks begin their next move up. Catching stocks as they move out of a correction offers the lowest risk to highest reward entry point. The key is not to get into early and whipsawed out of your positions.
This indicator has done a good job of keeping you out of the sideways chop we’ve experienced since August. What does this indicator tell us about those bullish thrusts we experienced towards the end of November?
While impressive, the $NAHL index never crossed back up confirming the move. According to this indicator, cash has been the safest place for months.
For the working person this is an easy to use indicator allowing you to move into the market during the bull phases and get you out before significant corrections.