V.6:5 (173-174): An assist in market timing by Irving Lehren

V.6:5 (173-174): An assist in market timing by Irving Lehren
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An assist in market timing by Irving Lehren

Determining turning points and changes in the stock market often requires looking back at how the market reacted under similar circumstances. But aberrations occur in most cycles and a trader must formulate some intuitive judgment to arrive at a decision.

An essential factor in coming to grips with the stock market should be an indicator composed of the stocks that make new highs each week. Logically, it should reveal the flow of money or the state of sentiment—if stocks are making new highs, this signifies the investment attitude is positive; a lessening of new highs signals non-conformance and results in a trend reversal.

In developing a reliable indicator of market sentiment based on new highs, I tried various time periods and found that a running five-week total of new highs resulted in an easily kept chart (Figure 1) and few whipsaws.

You can construct this chart of the New Highs Indicator using the weekly "new highs" number published in Barron's or The New York Times.

Start by adding the weekly number of stocks making new highs for the past five weeks. Each week, add the current number of new highs and subtract the oldest new highs number.

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