How To Use TM's Indicators: The 60-Day New Highs/Lows On Double Volume List

New 60-day highs or lows accompanied by double volume (NH/NL DV) are important technical signals, because they often coincide with key market events. For example, they commonly precede explosive moves, as informed traders jump on (or dump) a stock. On the other hand, they also can signal exhaustion points in a market.

We first will analyze what new highs or lows on high volume say about market action, and discuss the other analysis techniques you can use to confirm these signals and help determine if a stock is at the beginning or end of a trend.

Market Dynamics

New 60-day highs/lows on double volume are exactly what they sound like: When a stock makes at least a two-month (approximately 43 trading days) high or low, on twice or more of its average daily volume.

Volume drives a market higher or lower. When a stock makes a new high on heavy volume, it suggests investors are flooding into the stock and their euphoria will push it higher. (See Figure 1.) But, such action also occurs at the end of price moves as the last-gasp buyers jump into the market. (See Figure 2.) If the final buyers are dog-piling into the market and the sellers are willing to accommodate them, the market will stall and eventually reverse when there are no buyers left to enter the market.

Figure 1. Stocks often make new 60-day highs on double volume (NHDV) immediately before exploding higher. (PECS | Quote | Chart | News | PowerRating) takes off after making a NHDV on 11/14/01.

Figure 2. New 60-day highs on double volume often mark the end of a rally as the last buyers rush into the market. Notice the NHDV on 12/5/01 marks the end of the up move for (THQ | Quote | Chart | News | PowerRating).

A New Beginning Or The End Of The Line?

Trading is a matter of assembling various puzzle pieces to complete a picture of the market. Because 60-day new highs/lows on double volume do not by themselves indicate the direction the market is headed, it is necessary to take other factors into consideration. Combining chart analysis with the NH/NL DV signal helps define the nature of the pattern--whether a particular new high is a breakout or exhaustion point. Other bullish or bearish technical signals put the NH/NL DV signal in context. In Figure 3, for example, when a 60-day new high on double volume occurs after a bullish cup-and-handle pattern, it suggests the stock is headed higher.

Figure 3. When a new 60-day high follows a bullish pattern, it often leads to much higher prices. (GNSS | Quote | Chart | News | PowerRating) is a cup and handle.

You also can use something as simple as overall trend direction to confirm a signal. A 60-day new low on double volume suggests after a long downtrend suggest the trend will continue or quite possibly accelerate. (See Figure 4.)

Figure 4. New 60-day highs/lows on double volume suggest trend continuation (and often acceleration) when they occur after a trend is established. (ENE | Quote | Chart | News | PowerRating) was in a down trend before it formed a NL. Enron gave several NLDV signals before imploding entirely.

However, it is important to remember that a market will not continue to go down just because it already has dropped and a 60-day new low on double volume has occurred. You must be very careful when a NH/NL DV follows a parabolic move, for example. NH/NL DV signals in these situations often imply the end of a trend, as the last traders rush into the stock and the "smart money" takes the other side. (See Figure 5.)

Figure 5. New 60-day lows on double volume (NLDV) suggest trend exhaustion, as the last of the longs lose hope and dump their positions. Notice that (AMR | Quote | Chart | News | PowerRating) loses nearly half its value in two weeks, ending with an NLDV. This proved to be the stock's precise bottom.

Classic chart patterns like double tops also offer clues about market direction. For example, if a stock forms a double top on twice its average volume, the stock's failure to rally past the first peak of the formation suggests those who bought the first peak are looking to bail out of their positions at break-even. It also may suggest short sellers are attempting to pick a top. (See Figure 6.)

Figure 6. Classic chart analysis helps determine if a new 60-Day high on double volume (NHDV) is a top rather than a trend continuation or breakout. (BC | Quote | Chart | News | PowerRating) makes an NHDV but fails to follow though, forming a double top.

While markets often take off (or bottom or top) immediately after a NH/NL DV forms, they do not always conform to this basic model. Stocks often move sideways or "rest" from as short as a few days to as long as a few weeks after making a NH/NL DV. This may happen because a trader (with information about the market) does not want to execute his entire position at one time, for fear he will attract the attention of other traders and the market will get away from him. When a stock hits a new high (or low) on twice its average volume, it may be worthwhile to pay attention to it for the next several days or weeks--the buyer may return and kick the market back into gear. (See Figure 7.)

Figure 7. When a stock makes a new 60-day high or low on double volume, it may be worth watching to see if the buyers (or sellers ) return (INVN | Quote | Chart | News | PowerRating) makes an NHDV (A), trades sideways for three weeks, makes another NHDV (B), trades sideways another three weeks, and then makes yet another NHDV (C), then trades sideways one more week, before skyrocketing higher.

Summary

60-day new highs/lows on double volume are useful tools because they often coincide with important market developments, i.e., breakouts and trend continuations, or exhaustion moves. They also can reflect smart money attempting to accumulate (or dump) a stock. Alone, they do not imply market direction; other analysis tools can be used to put these signals in context and give a clearer picture of price action.

Stocks in long bases that make new highs on twice their average volume may explode because traders with inside knowledge are accumulating the stock. Markets that have made parabolic moves before forming a NH/NL DV may have topped out as the last of the traders rush into the market. Classical chart formations like cup-and-handle patterns and double tops also indicate whether the market is making a breakout or exhaustion move. Finally, stocks do not always conform to this model. A market often will make a NH/NL DV and then trade sideways for a few days or weeks before making a move.

New 60-day Highs on Double Volume and New 60-day Lows on Double Volume lists are updated daily on our site.

How To Find It

From the TradingMarkets home page, click "Stocks," then "Indicators." Look under both "Uptrending Indicators" and "Downtrending Indicators."

When it comes down to it, there are only two important factors in the stock market: price and volume. Every "man-made" indicator keys off these two. By using the New 60-day Highs/Lows on Double Volume lists, you are dealing directly with what counts the most.

Why Use It?

Simple. It will save you time, make your life easier, and give you some of the most effective setups currently in the market.

Who Can Benefit From It?

Intermediate-term traders, as well as daytraders and options traders. These stocks will attract a lot of attention, at least for a few days. Momentum traders will be looking for follow-through. Daytraders can expect more volatility near-term. For option traders, because there is a high probability for short-term follow through, these are interesting plays for contracts that have little time value left.

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