Technical Indicators: A Primer

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New Highs and New Lows

These indicators are pure and simple: They tell how many stocks are making 52-week highs or lows on any given day. They can be used to show divergences in the market as well. For instance, if the Dow Jones Industrial Average makes a new low and the number of stocks making new lows shrinks, then there must be a reason there was no participation on the downside. In that case, the market has a positive divergence.

In a bull market, the number of new highs could be expected to expand as the market rallies. If it does not expand, then you need to consider the possibility that this represents a failing rally and be decidedly more cautious on the market.

Overbought/Oversold Oscillator

There are many ways to calculate an oscillator. The one I use is a simple 10-day moving average of the net differential of advancing issues minus declining issues on the New York Stock Exchange .

Overbought and oversold have to do with momentum and not necessarily price. This is an important point: Just because a market has slid in a big way does not necessarily mean it is oversold -- and vice versa. Since this is a momentum-related measure, one should be more concerned with the magnitude rather than the actual level of the move.

For example, a truly weak market can get oversold and stay oversold by simply gaining downside momentum.