A Daily
New High - New Low
Market System

Here's a new system using daily statistics to issue buy and sell signals for the stock market.

While weekly models are good for filtering out daily price fluctuation noise, they can leave the trader exposed to large adverse price movements or loss of opportunity during the trading days between the weekly buy and sell signals. Weekly models also have some weekly data distortions each year due to holidays. The short four-day workweek affects the total number of new highs and new lows counted during the week. This short count affects parameter estimation and could lead to false signals.

"Here, I will build on the previous ADL-NH-NL system and develop a new market system based upon the daily NYSE advancing and declining issues and the NYSE 52-week daily new highs and new lows. Before proceeding with the model and discussion, however, let's define the input variables and constants. Because I used Omega Research's TradeStation to test the trading system, I will also use TradeStation's format for the formulas."

A model receives information, called inputs, and then modifies the inputs using mathematical equations, which can then provide the user with a prediction. An example of an input is today's closing price of the Dow Jones Industrial Average (DJIA).

This model's inputs are as follows:

Inputs
ai = Daily NYSE advancing issues
di = Daily NYSE declining issues
nl = Daily NYSE 52-week new lows
nh = Daily NYSE 52-week new highs
djc = DJIA closing price
spx = Standard & Poor's 500

"Next, the inputs are used in mathematical equations. Daily data can vary around a trend, so to reduce this noise I smoothed the data with an exponential moving average."

The ADRrs-NH-NL STOCK MARKET SYSTEM

"With the definitions out of the way, we're now ready to define the system itself. For buy signals, the system is looking for the ADRrs to be strong and above a certain number, for the NLstr to be weak (with fewer new lows generated than before) and for the NHstr to be strong (with more new highs to be generated than before). Sell signals are constructed using the opposite logic."

Buy rule:
If ADRrs is greater than or equal to the value Brs
and
NLstr is less than or equal to the value NLbx
and
NHstr is greater than or equal to the valuE NHbx, then
Buy the S&P 500 on the close.

Sell rule:
If ADRrs is less than or equal to the value Srs
and
NLstr is greater than or equal to the value NLsx
and
NHstr is less than or equal to the value NHsx, then
Sell the S&P 500 on the close.

Excerpted from an article originally published in the January 1997 issue of Technical Analysis of STOCKS & COMMODITIES magazine. © Copyright 1996, Technical Analysis, Inc. All rights reserved.

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