Trader’s Narrative

On light volume, the market closed strongly down today ahead of the US Thanksgiving holiday. The action brought about an acceleration in the number of new lows (52 week) relative to the number of new highs.

The ratio of new highs to new lows is one of my favourite technical indicators because it has an uncanny predictive power. Like the majority of breadth indicators, it is much more accurate in finding bottoms than peaks.

The last time I mentioned this indicator, I highlighted its cousin the new highs/new lows indicator which is a slightly different way to look at the same data to make it normalized on a 0-100 scale.

At the beginning of August it had flashed a critical level which presaged the summer to fall recovery. Right now it is even lower than the minimum it reached in mid-August 2007.

Here is a chart showing the ratio of Nasdaq new 52 week highs to new lows since 2000. Notice how the spike lows match every significant market bottom:

Of course, the reason why this indicator has such predictive qualities is that it highlights when the market is near a “wash out” stage where all the weak hands have sold and there is a total disequilibrium in sentiment.

I don’t think we’re at an inflection point just yet but we are darned close. So keep your powder dry and sleep with one eye open.