What is the High-Low Index?
The High-Low Index looks at stocks achieving their 52-week highs compared to those hitting 52-week lows. It serves as a vital tool for investors and traders, confirming the prevailing market trends of a broad market index like the S&P 500.
Understanding the High-Low Index
The High-Low Index is essentially a 10-day moving average of the record high percent indicator, which is computed as follows:
1divide New Highs by New Highs + New Lows, then multiply by 100
Investors perceive the High-Low Index as bullish when the value is positive and rising and bearish when it is negative and falling. Considering its day-to-day volatility, market analysts prefer using a moving average to smooth out these variations, thereby generating more dependable signals.
Interpreting the High-Low Index
When the High-Low Index exceeds 50, more stocks are hitting 52-week highs than lows. Conversely, a reading below 50 indicates that more stocks are plunging to 52-week lows. Typically, indices above 70 suggest a strong upward trend, while those below 30 indicate a downward trend. Investors should note that during strong market trends, the index can show extreme readings for extended periods.
Trading with the High-Low Index
Many traders incorporate a 20-day moving average as a signal line with the High-Low Index. The index triggers a buy signal when it crosses above its moving average and a sell signal when it crosses below. Traders can enhance these signals by pairing them with other technical indicators, such as requiring the Relative Strength Index (RSI) to be above zero to confirm upward momentum during a trade signal.
Moreover, if the High-Low Index is above 50, traders might focus only on long positions, fastening a bullish stance.
Example of the High-Low Indicator
Apply the High-Low Index judiciously, by interpreting the example displayed, to heighten your trading successes. Appreciate its ability to confirm market trends and signal timely entry or exit points. Start leveraging the High-Low Index today for a more strategic approach to your investments.
Related Terms: Moving Average, Bullish, Bearish, Relative Strength Index, Signal Line, Market Index.
References
Get ready to put your knowledge to the test with this intriguing quiz!
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## What does the High-Low Index measure in financial markets?
- [ ] The volatility of a single stock
- [ ] Average trading volume
- [ ] Frequency of dividend payments
- [x] Market breadth
## How is the High-Low Index calculated?
- [x] 10-day moving average of record highs divided by the sum of record highs and lows
- [ ] Average of the closing prices over the last 20 days
- [ ] Sum of market capitalization of top 30 companies
- [ ] Median stock performance
## What type of market does a High-Low Index above 70 indicate?
- [ ] Bear market
- [ ] Consolidating market
- [x] Bull market
- [ ] Sideways market
## What does a High-Low Index below 30 typically signal?
- [x] Potential market weakness or bearish conditions
- [ ] A market correction has ended
- [ ] Strong buy recommendation
- [ ] Market is overbought
## Which component stock exchanges are typically used in calculating the High-Low Index for U.S. markets?
- [x] NASDAQ and NYSE
- [ ] Only NASDAQ
- [ ] Only NYSE
- [ ] NYSE and Chicago Board Options Exchange
## What might an investor infer from a consistently declining High-Low Index?
- [x] Widening market decline
- [ ] Price stabilization
- [ ] Increased trading activity
- [ ] Market may be approaching a peak
## When is the High-Low Index most useful to investors?
- [ ] During high dividend seasons
- [x] During market trend confirmation
- [ ] During earnings reports
- [ ] Throughout mergers and acquisitions
## What does a rising High-Low Index indicate regarding record highs and lows?
- [ ] Record highs are splitting equally between gains and losses
- [ ] Record lows outnumber record highs
- [x] Record highs outnumber record lows
- [ ] Equal number of record highs and lows
## What type of trader is most likely to use the High-Low Index?
- [ ] Day trader
- [ ] Options trader
- [x] Technical analyst
- [ ] Bond trader
## Which of the following does NOT affect the calculation of the High-Low Index?
- [ ] Number of new record highs
- [x] Interest rates
- [ ] Number of new record lows
- [ ] 10-day moving average of highs and lows
