What is the High-Low Index?
Let me explain the high-low index directly to you. It compares stocks that are reaching their 52-week highs with those hitting their 52-week lows. As an investor or trader, you use the high-low index to confirm the prevailing market trend of a broad market index, such as the Standard and Poor’s 500 index (S&P 500).
Understanding the High-Low Index
You should know that the high-low index is simply a 10-day moving average of the record high percent indicator, which divides new highs by new highs plus new lows. The record high percent indicator is calculated as follows: Record High Percent = (New Highs / (New Highs + New Lows)) × 100.
I consider the high-low index bullish if it is positive and rising, and bearish if it is negative and falling. Since the index can be volatile on a day-to-day basis, you generally apply a moving average to the data to smooth out the daily swings. This helps generate more reliable signals.
Interpreting the High-Low Index
A high-low index above 50 means more stocks are reaching 52-week highs than reaching 52-week lows. Conversely, a reading below 50 shows that more stocks are making 52-week lows compared to stocks making 52-week highs. Therefore, you are generally bullish when the index rises above 50 and bearish when it declines below 50.
Typically, readings above 70 indicate that the market is trending higher, while a reading below 30 suggests that the market is in a downtrend. You should also be aware that if the market is trending strongly, the high-low index can give extreme readings for a prolonged period.
Trading with the High-Low Index
Many traders add a 20-day moving average to the high-low index and use it as a signal line to enter a trade. The index generates a buy signal when it crosses above its moving average, and a sell signal when it crosses below its moving average.
You should filter the signals generated by the high-low index with other technical indicators. For example, you might require the relative strength index (RSI) to be above zero when the index crosses above its 20-day moving average to confirm upward momentum.
The high-low index can also be used to form a bullish or bearish bias. For instance, if the indicator is above 50, you may decide to trade on the long side of the market only.
Example of the High-Low Indicator
To illustrate, consider a chart showing the high-low index applied to a market index, where you can see the index line fluctuating with a moving average, highlighting crossovers that signal potential trades. Such visuals demonstrate how the index behaves in real market conditions, with peaks above 70 indicating strong uptrends and dips below 30 showing downtrends.
Other articles for you
Random walk theory asserts that stock prices move randomly and unpredictably, making it impossible to consistently outperform the market without extra risk.
A tweezer is a candlestick pattern in technical analysis that signals potential market reversals at tops or bottoms.
Technical analysis uses historical market data to predict future price movements in securities.
The price-to-book (P/B) ratio compares a company's market value to its book value to help identify undervalued stocks.
The 30-year Treasury is a long-term U.S
Straight-through processing (STP) automates financial transactions to eliminate manual intervention, boosting efficiency in payments and securities trading.
An umpire clause in insurance policies allows for dispute resolution through appraisers and an umpire when the insurer and insured disagree on claim amounts.
Equity compensation provides employees with non-cash ownership stakes in a company to encourage retention and profit-sharing.
A projected benefit obligation (PBO) measures a company's current funding needs for future pension liabilities, accounting for expected salary increases.
An ascending channel is a technical analysis pattern showing an uptrend with higher highs and lows between parallel upward-sloping lines.