The High-Low Index is a breadth indicator based on the Record High Percent Index. In fact, the High-Low Index is simply a 10-day SMA of the Record High Percent Index. This article will explain how to identify the direction of the High-Low Index and how to use the absolute level for a trading bias. Stockcharts.com provides High-Low Indexes for the eight stock collections listed below.
Record High Percent = (New Highs / (New Highs + New Lows)) x 100 High-Low Index = 10-day SMA of the Record High Percent
The High-Low Index smooths the Record High Percent Index with a 10-day SMA. Chart 1 above shows the Record High Percent Index in the first indicator window (black line) and the High-Low Index in the second indicator window (red line). Notice how the S&P 100 High-Low Index ($OEXHILO) smooths the S&P 100 Record High Percent Index ($RHOEX), especially during May-June 2010. $RHOEX bounced from 0 to 100 numerous times, but $OEXHILO trended lower in May and higher in June.
In general, a stock index is deemed strong (bullish) when the High-Low Index is above 50, which means new highs have outnumbered new lows for several days. Conversely, a stock index is deemed weak (bearish) when the High-Low Index is below 50, which means new lows have outnumbered new highs for several days. This indicator can move to its extremities and remain near its extremes when the underlying index is in a strong uptrend or downtrend. Readings consistently above 70 usually coincide with a strong uptrend. Readings consistently below 30 usually coincide with a strong downtrend.
The directional movement of the High-Low Index shows when new highs are expanding or contracting, which in turns reflects underlying strength or weakness in the underlying index. Chartists can establish direction by applying a moving average to the High-Low Index. Chart 2 shows the NY Composite with NYSE High-Low Index ($NYHILO) and its 20-day SMA. The High-Low Index turns up when it moves above the 20-day SMA and turns down when it moves below the 20-day SMA. New highs are increasing and/or new lows are decreasing when the High-Low Index rises. New highs are decreasing and/or new lows are increasing when the High-Low Index falls.
The green dotted lines show the High-Low Index turning up and moving above its 20-day SMA, which is positive for the NY Composite. The red dotted lines show the High-Low Index moving below its 20-day SMA, which is negative for the NY Composite. Because the bigger trend was down from October 2007 to March 2009, the bearish signals worked much better than the bullish signals.
The absolute level of the High-Low Index can also be used to ascertain strength or weakness in new highs, which in turn reflects underlying strength or weakness in the index. Sometimes the High-Low Index can be rather volatile, but still remain consistently above or below its midpoint (50). Remember, new highs outnumber new lows when above 50 and new lows outnumber new highs when below 50. This level provides a clear bullish or bearish bias for the underlying index.
Chart 3 shows the Nasdaq with its High-Low Index and a 20-day SMA. The High-Low Index moved above/below its 20-day SMA many times from June to August 2006 and from November 2006 to February 2007. Playing these crossovers would have resulted in numerous whipsaws. Instead, chartists can look at the overall level of the High-Low Index. Notice how the index moved below 50 at the end of May and remained below 50 until late August (3 months). Once moving above 50, the index remained above 50 until early March (7 months). Not all signals will last this long though.
Armed with a bullish or bearish bias, chartists can then turn to other aspects of technical analysis to generate signals. Chartists can focus on bullish signals when the High-Low Index is above 50 and ignore bearish signals. Oversold readings, resistance breakouts or bullish moving average crosses can be used in a bullish environment. Chartists can focus on bearish signals when the index moves below 50 and ignore bullish signals. Overbought readings, support breaks and bearish moving average crosses can be used in a bearish environment.
New 52-week highs and new 52-week lows are considered lagging indicators. In other words, the market will change direction before there is a significant shift in the number of new 52-week highs or the number of new 52-week lows. Because it takes at least 52 weeks to forge a new high or a new low, an extended move is required for a stock to forge a new high or a new low. There are plenty of new highs after an extended advance, just as there are plenty of new lows after an extended decline. New highs dry up when a stock index corrects after an extended advance. Some new lows will surface during a correction, but it takes an extended decline to generate a serious increase in new lows. Similarly, new lows dry up when a stock index bounces after an extended decline. Some new highs may surface during this bounce, but it takes an extended advance to generate a serious increase in new lows.
As with its cousin, the Record High Percent Index, the High-Low Index is a breadth indicator specific to an underlying index. The Nasdaq 100 High-Low Index applies to stocks in the Nasdaq 100, the NYSE High-Low Index applies to stocks in the NY Composite and so on. Like all indicators, High-Low Index is not meant as a stand alone indicator. It should be used in conjunction with other aspects of technical analysis. Momentum reversals or breakouts can be used to confirm rises in the High-Low Index. Similarly, momentum reversals and support breaks can be used to confirm declines in the High-Low Index.
SharpCharts users can plot the High-Low Index for eight different collections of stocks, including the S&P 500, TSX Composite and the Dow. A list of symbols can be found at the beginning of this article. In SharpCharts, the High-Low Index is plotted by using the "Price" indicator. It is often helpful to plot the underlying index along with the indicator for easy reference. The High-Low Index can be plotted in an indicator window or in the main chart window. It can even be plotted behind the price plot of the underlying index. In this example, the index is shown in the main window with the corresponding High-Low Index plotted behind it. The High-Low Index is also plotted in the lower indicator window. First, enter the index symbol in the "symbol" box in the upper left. Second, go to "indicators" and select "Price". Third, enter the symbol for the High-Low Index in the "parameters" box. Fourth, select "above, below or behind" for the "position" of the indicator plot. A moving average can be added by choosing "advanced options" and selecting an "overlay". Click here for a live example.