It is a sharper measure than advances and declines because it only counts stocks at genuine extremes. A healthy advance produces expanding new highs; a market where new lows expand while the index holds up is showing internal damage.
The most cited pattern is a market making index highs while new highs contract, which was a feature ahead of several historical tops. The reverse, new lows contracting during a decline, is watched as an early sign of a bottoming process.
It is sensitive to the lookback anniversary: a year after a crash, the comparison base is artificially low, which inflates new highs for reasons that have nothing to do with current strength. Always check what the comparison period contains.
Related: market-breadth, advance-decline-line, percent-above-moving-average, divergence, distribution