Watch new highs versus new lows — a worrying indicator
The U.S. stock market rally is crumbling beneath the surface, while bids remain persistent and dips are shallow to non-existent.
I recently talked about problems sighted with this rally, but today I want to highlight another notably large divergence taking place underneath the market, a trend visibly similar to the lead-up to the 2018 highs.
The index I want to highlight is the NYSE Composite Index NYA, +0.26%, which reached a key technical pivot this week, its previously unfilled open gap from January 2018:
What is the NYSE Composite Index NYA, +0.26% ? It’s a broad index covering more than 2,000 stocks. It’s a significant index, but unlike the Dow Jones Industrial Average DJIA, +0.39%, Nasdaq 100 or S&P 500 SPX, +0.22%, it has not made new highs in 2019, joining the crowd of other lagging indices, notably small-caps, transports and the banking sector.
By filling its open gap from 2018, the NYSE Composite Index NYA, +0.26% has reached an important technical pivot; hence, the initial rejection from the open gap fill is not a surprise. Does it mean it can’t reach new highs? No, it can, but as with any rally, one must keep a close eye on new highs versus new lows.
While new highs versus new lows tend to ebb and flow along with price during this recent rally, the new pattern has been falling dramatically, similar to the lead-up to the September 2018 highs:
It’s a complete non-confirmation of the move.
What’s that mean? Nothing for now, but it is a stern warning that says, unless this divergence repairs itself soon — and dramatically — this divergence is signaling that this rally, or future rallies, are selling opportunities.
The NYSE Composite Index NYA, +0.26% made a new high in August 2018 with new highs versus new lows already diverging negatively. The subsequent new highs in September 2018 showed a further deterioration of new highs versus new lows. And then the bottom fell out.
So be aware: This lack of confirmation in new highs versus new lows may be a leading indicator suggesting that this rally is built on a crumbling road. As in 2018, this does not preclude marginal new highs to come, but without confirming strength in new highs versus new lows, this rally may be in big trouble.