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Why the New-Highs List Matters

This column was originally published on RealMoney on Aug. 5 at 12:49 p.m. EDT. It's being republished as a bonus for readers.

Did you notice that stocks didn't get taken down in huge chunks Thursday? Instead, it was a nickel here and a dime there. Sure, a handful of stocks were down a dollar here or a dollar there, but there wasn't much of that.

And how many times did you hear about the retailers and how awful their July sales were? The one I liked even better was Aeropostale (ARO) lowering its forecast for earnings, and then they showed you what the stock was doing: down two bucks on the day. What they forgot to tell you was that the stock, when it opened for trading Thursday, was already from $35 to $29 in a straight line. This news should not have come as a shock to anyone looking at that chart, should it?

Just because the stock is coming into support, I wouldn't sanction buying it, but look at that chart, folks. This news should not have shocked anyone. And if the market was so worried about these retail sales only Thursday, then why was the stock already in free fall for the last month?

Or why did Abercrombie & Fitch (ANF) make its high in early July? Or American Eagle Outfitters (AEOS)? I can go on and on, but my point is that this is why I pay such close attention to the stocks that are making new highs.

I pay such close attention to this particular statistic because the averages can keep going up because of the mathematical calculations that go into the makeup of the averages, but math cannot change the number of stocks making new highs. And if the number of stocks making new highs is not increasing as the underlying index makes a new high, there is a message in that. That's why we call it a negative divergence.

So I will repeat what I have been saying for nearly a month now: The number of stocks on both the NYSE and Nasdaq peaked back on July 11. Back then the Nasdaq was at 2135 and the S&P was at 1219. And I continue to find that bothersome.

Of course, this can correct itself. After a corrective move, after the market gets oversold again, we could see a renewed rise with stocks having rested and corrected long enough to have the energy to surge to new highs again. But with us just about 1% off the recent highs in the market averages, 160 new highs on the NYSE is about 30% of the number of new highs we had a month ago, and 84 new highs on Nasdaq is also about 30% of what we had a month ago. That just will not do for now.

Overbought/Oversold Oscillators

For more explanation of these indicators, check out The Chartist's primer .

P.S. from Editor-in-Chief, Dave Morrow:
It's always been my opinion that it pays to have more -- not fewer -- expert market views and analyses when you're making investing or trading decisions. That's why I recommend you take advantage of our free trial offer to RealMoney premium Web site, where you'll get in-depth commentary and money-making strategies from over 50 Wall Street pros, including Jim Cramer. Take my advice -- try it now.

Helene Meisler writes a technical analysis column on the U.S. equity markets and updates her charts daily. Meisler trained at several Wall Street firms, including Goldman Sachs and SG Cowen, and has worked with the equity trading department at Cargill. At time of publication, she held no positions in any securities mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. She appreciates your feedback; click here to send her an email.

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