Often referred to just as the NH-NL index, or even simply as the NH-NL, the New-High New-Low index is applicable only to the stock market.
As the very notation of NH-NL suggests, the index in question is defined as the difference between the NH and the NL, where the NH is the number of stocks that have reached new highs on a given trading day and the NL is the number of stocks that have reached new lows on the same given trading day.
Thus, all we need to do to get the index value on any given trading day is to subtract the NL from the NH.
For any individual stock, a new high is reached when the bulls are totally in control of the stock, while a new low is reached when the bears dominate among the traders interested in it.
Because of that, the NH-NL index is a good indicator of the market overall bullishness or bearishness.
It can serve as a leading indicator, although this term is often abused, being used in cases where it should not apply.
When the NH-NL is above zero, the bulls claim the market lead, when it is below it, this claim belongs to the bears.
When both the market and the index in question reach new highs, this indicates a strong bull market and a high likelihood that this bullish market trend will continue.
When both the market and the NH-NL attain new lows, this indicates a strong bear market and suggests that the market bearishness is here to stay.
It may happen, though, that divergences between the market and the index behavior occur.
What this means is that they no longer move in tandem.
It is important to watch for such divergences as they suggest that the overall bullishness or bearishness is weakening and may soon cease to exist.
For instance, if the market rallies, but the NH-NL declines, the bull is likely reaching its final stage.
On the other hand, if the market declines, but the NH-NL rises, we may be about to witness the end of the bear market.
There are also other ways of interpreting the NH-NL index.
Here are two examples of this.
On a flat market day, a rise in the NH-NL is a bullish signal, while a decline in the NH-NL sends a bearish message.
If the NH-NL stays negative for a longer period of time, then suddenly rises above the zero line, a bull market is very close.
On the other hand, if it remains positive for some time and then suddenly falls below the zero line, a bear market is likely to follow soon.
In terms of concrete numbers, the NH-NL very rarely goes above 100, and also very rarely goes below -100.
When this happens, we have extreme situations.
In the first case, while the market may not collapse, it will likely not advance to reach new highs.
In the second case, the bear is considered to be losing its strength, but an immediate reversal will probably not happen.
However, such an immediate reversal is much more likely when the NH-NL approaches -100.
The NH-NL index also suggests appropriate trading actions for existing open positions.
If the NH-NL rises, long positions can be held or even added to.
If, however, the NH-NL declines while the market rallies, this divergence implies that long positions should no longer be increased and it is probably even better to liquidate them.
A declining NH-NL index, confirms short positions, but shorts should be covered if the market falls with the NH-NL rising.
As the very notation of NH-NL suggests, the index in question is defined as the difference between the NH and the NL, where the NH is the number of stocks that have reached new highs on a given trading day and the NL is the number of stocks that have reached new lows on the same given trading day.
Thus, all we need to do to get the index value on any given trading day is to subtract the NL from the NH.
For any individual stock, a new high is reached when the bulls are totally in control of the stock, while a new low is reached when the bears dominate among the traders interested in it.
Because of that, the NH-NL index is a good indicator of the market overall bullishness or bearishness.
It can serve as a leading indicator, although this term is often abused, being used in cases where it should not apply.
When the NH-NL is above zero, the bulls claim the market lead, when it is below it, this claim belongs to the bears.
When both the market and the index in question reach new highs, this indicates a strong bull market and a high likelihood that this bullish market trend will continue.
When both the market and the NH-NL attain new lows, this indicates a strong bear market and suggests that the market bearishness is here to stay.
It may happen, though, that divergences between the market and the index behavior occur.
What this means is that they no longer move in tandem.
It is important to watch for such divergences as they suggest that the overall bullishness or bearishness is weakening and may soon cease to exist.
For instance, if the market rallies, but the NH-NL declines, the bull is likely reaching its final stage.
On the other hand, if the market declines, but the NH-NL rises, we may be about to witness the end of the bear market.
There are also other ways of interpreting the NH-NL index.
Here are two examples of this.
On a flat market day, a rise in the NH-NL is a bullish signal, while a decline in the NH-NL sends a bearish message.
If the NH-NL stays negative for a longer period of time, then suddenly rises above the zero line, a bull market is very close.
On the other hand, if it remains positive for some time and then suddenly falls below the zero line, a bear market is likely to follow soon.
In terms of concrete numbers, the NH-NL very rarely goes above 100, and also very rarely goes below -100.
When this happens, we have extreme situations.
In the first case, while the market may not collapse, it will likely not advance to reach new highs.
In the second case, the bear is considered to be losing its strength, but an immediate reversal will probably not happen.
However, such an immediate reversal is much more likely when the NH-NL approaches -100.
The NH-NL index also suggests appropriate trading actions for existing open positions.
If the NH-NL rises, long positions can be held or even added to.
If, however, the NH-NL declines while the market rallies, this divergence implies that long positions should no longer be increased and it is probably even better to liquidate them.
A declining NH-NL index, confirms short positions, but shorts should be covered if the market falls with the NH-NL rising.