New highs/new lows by Arthur A. Merrill, C. M. T.
Each day the number of stocks making new highs and the number making new lows are reported in the financial press. Are these statistics useful? To find out whether they were, I constructed an index of new highs/new lows by calculating the percentage of new highs made over the preceding 10 days to the sum of new highs and new lows in the same 10 days:
100(10- day total highs) / 10- day total new highs and lows
I tested the index with two sets of benchmarks: two-thirds of a standard deviation above and below the mean, and a full standard deviation above and below the mean. Data points exceeding these benchmarks were considered unusually high or low and were tested over a 10-year period.
Then I counted the number of times the indicator successfully called the direction of the Dow Jones Industrial Average (DJIA) over the next week, the next five, 13 and 26 weeks and the next year. This test provided 10 batting averages: five for the two-thirds standard deviation benchmarks and five for the full standard deviation.