One of the better short term indicators that I follow is the high/low index on the Nasdaq. This index is so simple that it can be calculated by a fifth grader, yet so telling that you can use it to spot potential opportunities when the market gets to extremes.
The Nasdaq high/low is the ratio of stocks on the Naz that are hitting new highs divided by the total number of new highs and new lows, expressed in terms of percentage. Assuming you have access to daily data on the number of new highs and new lows, you can set up an Excel spreadsheet to do the calculations. It’s pretty low tech. Guys like me appreciate that. Once you get a daily percentage, then just track it on a 10 day MA.
What I’m seeing now is that the Nasdaq High/Low is at 6%.
Simply put, almost 20 times more stocks are making new lows vs. new highs. Anything below 10% is considered a “washed-out” and very oversold market. The only other times the high/low was recently at these levels was in January and March of this year.
A move to below 6% would put the occurrence at more than 2 std deviations from the mean. In other words, statistical probabilities point to this as a rare situation that probably won’t last for very long.
Confirmation of a short term bottom in the Naz would be if the high/low increased to 12% from where it’s at now.
Consider also that putting in a bottom in the market is a process, not an event. We are now at what appears to be a third “bottom” in the past 6 months.
Just saying…..
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