Stocks & Commodities V. 8:6 (228-229): New highs/new lows by Arthur A. Merrill, C. M. T.

New highs/new lows

by Arthur A. Merrill, C. M. T.

E ach day the number of stocks making new highs and the number making new lows are reported in the
financial press. Are these statistics useful? To find out whether they were, I constructed an index of new
highs/new lows by calculating the percentage of new highs made over the preceding 10 days to the sum
of new highs and new lows in the same 10 days:

100(10 - day total highs)

10 - day total new highs and lows

I tested the index with two sets of benchmarks: two-thirds of a standard deviation above and below the
mean, and a full standard deviation above and below the mean. Data points exceeding these benchmarks
were considered unusually high or low and were tested over a 10-year period.
Then I counted the number of times the indicator successfully called the direction of the Dow Jones
Industrial Average (DJIA) over the next week, the next five, 13 and 26 weeks and the next year. This test
provided 10 batting averages: five for the two-thirds standard deviation benchmarks and five for the full
standard deviation.
Results? Of the 10 batting averages, only one highly significant success appeared: Using the benchmark
of one standard deviation, the indicator succeeded 65% of the time in calling the direction of the DJIA
over the next year. The upper benchmark was 92.4% new highs and the lower, 35.7% new highs. The
index turned out to be an overbought/oversold indicator. An excess of new highs is a bearish signal and
an excess of new lows is bullish.
Figure 1 shows the performance of the indicator over the past six years. Figure 2 is the DJIA over the past
six years. The most impressive call by the indicator visible in Figure 1 is the quantity of bullish signals in
1984. Beautiful ! I wouldn't give good grades for the bearish signals in 1985 and 1986,but the bear call in
early 1987 was excellent. Following the 1987 crash, the bullish indications were right on the mark.
Incidentally, the scores for the indicator in 1980 and 1981 were very good. These years were in my test
period but aren't shown on the chart.
My conclusion is that we should listen to this indicator for long-term swings when it exceeds 92.4% or
falls below 35.7%. Note the latest figures in Figure 1. Bullish!
Arthur A . Merill is a Chartered Market Technician and the author of many reports and books including
Behavior of Prices on Wall Street and Filtered Waves, Basic Theory.

Figures Copyright (c) Technical Analysis Inc. 1

Stocks & Commodities V. 8:6 (228-229): New highs/new lows by Arthur A. Merrill, C. M. T.

FIGURE 1: The new highs/new lows indicator gives accurate calls for long-term swings when it
exceeds 92.4% or falls below 35. 7%.

FIGURE 2:

Figures Copyright (c) Technical Analysis Inc. 2