Technical Indicators: N
Natenberg Volatility
Historical volatility is defined by Sheldon Natenberg, as the standard deviation of the logarithmic
price changes measured at regular intervals of time.
Negative Volume Index
Norman Fosback first detailed the Negative Volume Index in his 1976 book, Stock Market Logic. Used in conjunction with the Positive Volume Index, it's an attempt to identify bull markets. These indicators are predicated on the assumption that smart money dominates trading on quiet days while less uninformed investors dominate trading on active days.
Fosback points out the odds of a bull market are 95 out of 100 when the NVI rises above its one-year moving average. The odds of a bull market are roughly 50/50 when the NVI is below its one-year average. Following this logic, the NVI is most useful as a bull market indicator.
New Highs-Lows Cumulative
The New Highs-Lows Cumulative function is a long-term market momentum indicator that determines the strength of the market. It's found by taking the total cumulative difference between new 52-week highs and new 52-week lows.
Interpretation of the New Highs-Lows Cumulative indicator is similar to the Advance/Decline Line in that divergences occur when the indicator fails to confirm the market index's high or low. Divergences during an up market indicate potential weakness just as divergences in a down market indicate potential strength.
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Use the New High-Low Cumulative to confirm a current trend. As most of the time the indicator will move in the same direction as the major indices, when the indicator and the market move in opposite directions a market reversal is predicted. This is due to a decreasing number of stocks participating in the higher prices eventually yielding a reversal in the price trend.
The value of this indicator at the beginning of the data series is zero. This is a cumulative indicator and as such the actual value is less relevant than the slope and direction of the line.
New Highs-New Lows
By displaying the daily difference between the number of stocks reaching new 52-week highs and the number of stocks reaching new 52-week lows, the New Highs-New Lows indicator attempts to determines the strength of the market.
Typically smoothed with a moving average to filter out day-to-day fluctuations and display longer term trends, use the indicator as both a divergence indicator and as an oscillator.
When used to show divergence, the New Highs-New Lows indicator generally reaches its extreme lows slightly before a major market bottom. As the market turns up, the indicator jumps up rapidly. During this time many new stocks are making new highs because it's easy to make a new high when prices have been depressed.
As cycles mature, a divergence occurs as fewer and fewer stocks achieve new highs (and the indicator falls), yet the market indices continue to reach new highs. This is a classic bearish divergence that indicates that the current upward trend is weak and will soon reverse.
Historically the indicator oscillates around zero. When positive, the bulls are in control. If it is negative, the bears are in control. Trade on the indicator by buying and selling as it passes across zero.
New Highs/Lows Ratio
The New Highs/Lows Ratio function calculates the daily ratio between the number of stocks reaching new 52-week highs to the number achieving 52-week lows.
This indicator is similar to the Advance/Decline Ratio and makes a reasonable overbought/oversold indicator for the market. Extremely high values may indicate that the market is becoming overbought. A sell-off may follow, which in turn would cause prices to drop. Likewise, extremely low values can indicate that the market is becoming oversold.
Since it concentrates only on a portion of the activity in the broad market, it is typically more useful as a confirmation for other indicators than directly generating entry/exit signals.
Use broad market indicators for trading against broad market indices through options, futures, and mutual funds. They can also be used to increase the effectiveness of more specific signals by adding confirmation or warning of upcoming trends.
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