Record highs versus seven-day breadth and divergence

A record high is only a hypothesis

An industrial-average yearly all-time high or a 400-point rally is treated as incomplete unless, within seven trading days before or after that high, 52-week composite lows outnumber 52-week composite highs.

Editorial reading: treat the record as an unconfirmed hypothesis. Run the seven-day high-low test first. Then require a second average or a related debt market to refuse the new high. Only after those checks should the confirmation stack of advance/decline prints and consecutive closes be used to call a reversal.

The seven-day high-low test

The seven-day high-low test is a market-breadth condition in which 52-week composite lows outnumber 52-week composite highs inside a seven-trading-day window around an industrial-average yearly record or a 400-point rally.

The 1988 case study listed six industrial-average peaks as episodes in which composite new lows exceeded new highs within seven days of the industrial high: May 1965, February 1966, January 1973, April 1976, July 1983, and 19 October 1987.

Cross-average reversal

A second reversal pattern, the cross-average reversal, is defined when any two widely followed averages, indices, or related cash or futures contracts fail to make new highs or new lows at roughly the same time.

The heaviest weight was placed on industrials, utilities, and a broad published market index. Editorial reading: this is the price-indicator divergence check that keeps a single average from standing alone.

The debt-equity capital link

A utilities average that does not match an industrials rise was read as tighter long-term financing and weakness in long-term bonds. Splits between related debt contracts, such as Treasury bonds versus Treasury bills, were treated as equally informative because they relate to capital available for equities.

One cited pairing was bill-futures lows on 15 October 1987 versus bond-futures lows on 19 October 1987. Editorial reading: that debt-equity capital link is the intermarket analysis overlay. It places the equity breadth signal in a financing and regime context rather than treating the industrial print as self-sufficient.

The confirmation stack

The confirmation stack is the secondary breadth and close-sequence filter used after an initial high-low test, a cross-average split, or a 10 percent range drop.

Minimum top confirmation was specified as two consecutive sessions with more than 1,000 declining issues and a 1:4 advance/decline print on one of those days, and/or declines above 1,000 on four of seven days; five consecutive lower closes on the industrial average; and five sessions in which yearly composite new lows exceeded new highs.

Bottoms use a different prompt

The all-time-high breadth pattern was described as never appearing at bottoms, so a 10 percent drop from an average's highest intraday high to its lowest intraday low became the prompt to search for base signals.

Full bottom confirmation mirrored the top rules with advancing issues above 1,000, a 4:1 advance/decline print, five higher closes, and five days of yearly new highs exceeding new lows, often preceded by an advance/decline ratio of 1:9 or weaker.

May-June 1965

In May-June 1965, an industrial high of 939 on 14 May was followed on 21 May by more yearly lows than highs. On 2 June the advance/decline ratio reached 1:5 (196 versus 1,000). On 28 June the average had fallen to 840, composite new highs printed zero, and the ratio reached 1:10. On 30 June that ratio reversed to 10:1.

Editorial reading: the 14 May print failed the seven-day high-low test inside a week, then June supplied the extreme advance/decline-ratio prints. The 30 June 10:1 reversal is recorded as a ratio flip, not as a claim that every bottom-confirmation filter printed that day.

August-October 1987

In 1987, mid-August new highs in a secondary-exchange index and the transportation average while utilities lagged, plus Treasury-bond splits versus municipal bonds and Eurodollars, preceded an industrial all-time high on 25 August and excess composite new lows six trading days later on 2 September.

By 8 September five lower industrial closes coincided with a second day of more than 1,000 declines and a 1:6 advance/decline ratio. A later bounce produced only four higher closes. Climax ratios printed nearly 1:16 on 16 October and 1:38 on 19 October.

Editorial reading: 1987 stacks the full sequence. Cross-average and debt-market splits appeared before the industrial record. The seven-day high-low test fired on 2 September. The confirmation stack printed by 8 September. The later bounce stopped at four higher closes, short of the five-close filter, and mid-October produced climax advance/decline-ratio extremes.