The High Low Index

Different ways to gauge the market breadth using this high fidelity indicator.

At any point in time, markets are in one of the following 3 regimes:

1. Bullish

2. Bearish

3. Basing/sideways

Logic entails that you go long only when you are sure that it is Bullish, go short only when you are sure it’s bearish, and possibly do not participate when it’s basing (going sideways).

But the market is not a single stock. Nifty 50 (or any other index) also doesn’t tell you the complete story. So why do you gauge these regimes?

You can do this with a variety of market-wide secondary data which are collectively known as breadth indicators.

Today I am going to tell you about the High-low indicators and other similar indicators which are derived from the same data i.e. the 52-week high and the 52-week low data.

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The Net High-low indicator:

First, let’s discuss the logic of this indicator. In a bullish environment, more stocks will make new 52-week highs and fewer stocks will make new 52-week lows. Conversely, in a bearish environment, fewer and fewer stocks will make 52-week highs while more and more stocks will break down below their previous 52-week lows.

So just looking at the total number of stocks that are making 52-week highs and comparing it with the number of stocks making 52-week lows will give you a pretty good idea of the market regime.

For example, The number of 52-week highs (top image) started to increase after 20th March 2023 and has been increasing since while at the same time, the number of 52-week lows (middle image) peaked and collapsed to NIL and has been very low since.

This exactly corroborates the start of bullish momentum as can be seen by the CNX500 (bottom image) chart (this is the closest index that represents the whole market).

Now, instead of looking at them separately, you can look at the

Net high-low number = {(52-week high) -(52-week low)}.

Let’s call this the Net High-low indicator (NHL).

Here is what the plot looks like below. I have annotated it and compared it against the N500 chart.

I can see the following observations:

1. A positive Net High low number is a decent line of control above which the Bullish regime begins and below which it’s likely to be a bearish regime.

2. A bearish to bullish transition in the market is always accompanied by a cross above from negative to positive in the NHL indicator.

3. As long as the NHL is positive, markets are either Bullish or sideways, never bearish.

4. As long as the NHL is negative, markets are either Bearish or sideways, never bullish.

5. Every cross-over of the NHL above and below 0 is a choppy indicator to be used as a buy-sell signal. This should rather be used as confirmatory signals of price action breakouts.

6. Additionally, trendline breakouts and top and bottom divergences can also be used as early signals of change in the market regime. See the breakdown of the NHL from an uptrending line during September 2022 before the market plummeted to a slow death.

This NHL indicator can be further improved or plotted in a slightly different way which might give some additional information.

The Net High-low Index (HLI):

{(52-week high- 52-week low)/ (52-week high + 52-week low)} * 100

Basically plotting the 52-week high as a percentage of the total (52-week high + 52-week low). Some people also plot a Moving average of this number instead of directly plotting the High Low index. It basically smoothens the curve. Alternatively, you can use both of them simultaneously and their crossovers also as additional signals. Potato, Potaeto, eh?

You will see how plotting it as a % turns this into an oscillator kind of indicator with 100 and -100 as the extreme values.

A similar observation can be made here so we made using the Net high low indicator:

1. Bullish periods are characterized by the HLI having a positive value and bearish/sideways periods have negative or near 0 values.

2. Ultra bullish periods have HLI reading near 100 and ultra bearish periods have HLI readings near -100.

3. A bullish-to-bearish transition has a sharp crossing (blue rectangles) of HLI from negative territory to positive territory and vice versa.

4. The divergences of tops and bottoms can also be used to make meaningful decisions but should be as usual used as a confirmation with price action as the primary indicator.

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Fractality of the High Low plots:

All these data can also be plotted for any timeframe and in any of those timeframes the high and low can be taken for any time frame and not just 52 weeks.

The resultant plot would still inform you about the breadth of the market albeit in it will be with respect to that timeframe.

To illustrate, here are the weekly (top) and Monthly (bottom) views of the High low data.

That is all I have for today.

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This is all for this weekend,

I will see you in the next one. Till then,

Don’t stop asking those stupid questions.

~ Homma