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Percent above moving averages, and new highs vs new lows

Lesson 9 · about 10 min

The A/D line tells you direction of participation. Two other daily series tell you the condition of the average stock: how many are in uptrends, and how many are at fresh extremes. Between them they give you an oversold/overbought read on the whole market that no index chart can.

Percent of stocks above a moving average

For a given index, count the members trading above their 50-day (or 200-day) simple moving average and divide by the number of members. The result is a percentage between 0 and 100.

Series Measures Speed
% above 20-day MA Very short-term participation Fast
% above 50-day MA Intermediate trend health Medium
% above 200-day MA Long-term trend health Slow

The 50-day version is the workhorse for swing traders. Rough zones on the S&P 500, treated as starting points:

100% ┤
 90% ┤ ▓▓▓▓ overbought; rallies often pause, but strong trends live here for weeks
 80% ┤ ▓▓▓▓
 70% ┤ ░░░░ healthy uptrend
 50% ┤ ──── neutral / mixed
 30% ┤ ░░░░ weak
 20% ┤ ▓▓▓▓ oversold; historically many swing lows form here
 10% ┤ ▓▓▓▓ washout
  0% ┤

Three ways to read it:

Level for condition. Below 20% on the 50-day means four stocks in five are in short-term downtrends. That is the kind of washed-out condition where bounces start, though "start" can mean next week rather than tomorrow.

Divergence at highs. Index at a new high with the % above 50-day at 55% when it was 80% at the previous high is the narrowing story again, from a different angle.

Crosses for regime. Some traders define the swing regime by the 50-day version: above 50% and rising is a long regime; below 50% and falling is a short or cash regime. Crude, but a crude filter that is applied is worth more than a subtle one that is not.

The 200-day version is a longer regime measure. Readings above 70-80% have marked healthy bull markets; sustained readings below 30% have marked bear markets; readings under 15% have appeared near major lows (2008-09, March 2020, autumn 2022 are recent examples), though never on a schedule.

Key idea: Percent above the 50-day is an oscillator for the whole market. Extremes mark exhausted conditions on both sides, and divergences at index highs mark narrowing. Use it to grade the regime and to avoid buying breakouts at 90% or shorting breakdowns at 10%.

New highs vs new lows

Each day the exchanges report how many stocks made a new 52-week high and how many made a new 52-week low. Net new highs = highs minus lows.

Condition Reading
New highs expanding, new lows near zero Healthy uptrend
Index at high, new highs fewer than at last high Narrowing; leadership thinning
New highs and new lows both elevated Split market; often precedes volatility
New lows expanding, highs near zero Downtrend
New lows spike then contract while index flat Selling exhaustion; watch for a low

The third row is the origin of the "Hindenburg Omen", a signal that fires when both highs and lows are elevated at the same time. Its record as a crash predictor is poor; it fires far more often than crashes occur. The underlying observation, that a split market is an unstable one, is sound. The specific omen is not a trading rule.

A cumulative net new highs line (add each day's highs minus lows) behaves like a slow A/D line and is useful for the same divergence reads.

The washout pattern

The single most useful new-lows pattern for swing traders:

Day:         1    2    3    4    5    6    7    8    9   10
New lows:   180  260  410  620  390  210  150  140   90   60
Index:      ─╲   ╲    ╲    ╲╲   ╲    ─    ─    ╱    ╱    ╱
                             ▲ peak in new lows
                                            ▲ index low, on fewer new lows

New lows peak on day 4 with the sharpest index decline. The index then goes lower (or retests) on days 5-7 with far fewer new lows. Fewer stocks are breaking down on each push; the selling is exhausting. This positive divergence in new lows has preceded many swing bottoms and is usually clearer than the equivalent in the A/D line.

It is not infallible. In a bear market it can print several times before the real low. Use it to lower short size and prepare long setups, not to buy blindly.

Combining the two

% above 50-day Net new highs Regime read
> 70%, rising Positive, expanding Broad uptrend; long breakouts favoured
> 70%, falling Positive but shrinking Late in the swing; tighten
40-60% Mixed Rotation or range; stock-specific
< 30%, falling Negative, expanding Downtrend; short setups favoured
< 20% Negative but peaked Washout; prepare for a bounce

You will notice this is the daily-timescale version of the trend/chop/reversal table from Module 2. The same logic applies: one series describes, two confirm, disagreement is information.

Sources and index choice

These series are published for the S&P 500, Nasdaq 100, Russell 2000 and the exchange composites. Use the one that matches what you trade. A small-cap trader checking S&P 500 breadth is reading the wrong room. Module 6 lists where each is available free.

Try it: Find the % of S&P 500 stocks above their 50-day MA for the last three years. Mark every reading below 20% and every reading above 90%. For each mark, note the index return over the next 10 and 20 sessions. You will find the base rate is asymmetric: lows below 20% tend to bounce more reliably than highs above 90% tend to fall.

Recap

  • Percent above the 50-day MA is a whole-market oscillator: above 80-90% is stretched, below 20% is washed out, divergence at index highs is narrowing.
  • The 200-day version grades the long-term regime; readings under 15% have appeared near major lows, never on a schedule.
  • New highs vs new lows show leadership health; elevated highs and lows together mark an unstable split market, though the "omen" built on it is a poor predictor.
  • A peak in new lows followed by an index retest on fewer new lows is a reliable exhaustion pattern for swing lows.
  • Use the series for the index you actually trade.

See it drawn

Original diagrams for the ideas on this page. Illustrative, not real market data.

Bearish divergence between price and RSIA price line whose second peak is higher than its first, drawn above an RSI panel whose second peak is lower than its first, with the two peaks joined by sloping dashed lines.PRICEhigher highRSI (14)70overbought30oversoldlower high
Divergence between price and RSI. RSI measures how one-sided recent price moves have been on a 0–100 scale. Here price sets a higher peak while RSI sets a lower one, so the second push carried less momentum than the first.
Trend structure: higher highs against lower lowsTwo zigzag price paths side by side; the left one steps upward with each peak and trough above the last, the right one steps downward with each peak and trough below the last.UPTRENDhigher highs, higher lowsHHHHHHHLHLHLDOWNTRENDlower highs, lower lowsLHLHLHLLLLLLHH higher high, HL higher low, LH lower high, LL lower low.
How a trend is built. A trend is just a sequence of turning points. While each peak and each dip sits above the one before it the market is trending up; once both start landing below the previous ones the structure has turned down.
A fast and a slow moving average crossingA jagged price line with two smoother average lines through it; the fast average dips below the slow one on the left and cuts back above it in the middle, where a circle marks the crossing.pricefast averageslow averagefast crosses belowfast crosses abovethe slow averageAverages of recent closes; the fast one reacts sooner than the slow one.
Fast and slow moving averages crossing. A moving average is the average of the last few closing prices, redrawn each period. An average over fewer periods turns sooner than one over many, so the two lines cross whenever the recent pace of the market changes.