New Lows at a Developing Stock Market Bottom

In a similar but converse vein, reductions in the number of stocks falling to mellows as market declines proceed represent positive breadth divergences; intern; market strength improves as price levels decline.
A major stock market bottom formation developed between the summer of 2002 and March 2003, a bottom formation characterized by three downside spikes in the Standard & Poor’s 500 Index-& spikes in the number of issues falling to new lows.
However, whereas the Standard &Poor’s 500 Index traced out one lower low an another nearly lower low during this period, the number of issues declinmg to near 52-week lows in price contracted sharply between the lows of July 2002 and March 2003. Although the Standard & Poor’s 500 Index stood at almost the exact level in March 2003 as it had been at the lows of July 2002, the number of issues falling 1 new lows had shown a decline from more than 900 to slightly more than 301 Clearly, the stock market was building internal strength, a precursor to the bull ma ket that soon ensued.
A summary of the basics follows:
Market advances accompanied by increases in the number of issues reaching new highs in price are advances that are well confirmed by market breadth. Such advances are likely to continue. Market advances that are not accompanied by increases in the number of issues reaching new highs in price are not as well grounded in internal strength as fully breadth-confirmed market advances. There are no precise and regular intervals in time between peaks in the number of new highs and ultimate peaks in the stock market averages. For example, in less than a year, the summer decline in 1998 followed peaks in new highs that had developed during 1997, whereas the fuU-scale bear market of 2000-2002 did not begin until more than two years after the 1997 peak in new highs. As a general rule, significant peaks in new highs tend to be seen perhaps one year or so before final bull market peaks.
Market declines accompanied by increasing numbers of issues falling to new lows are likely to continue. If new lows reach bear market peaks during a downside selling climax, with prices spiking down at the time, there are likely to be further tests of those price and breadth lows before final bear market bottoms are achieved.
Failures of new lows to expand with price declines represent positive breadth divergences and tend to be forerunners of stock market reversals to the upside. Again, breadth divergences, positive and negative, do not signal immediate market reversals. This family of indicators usually requires time for its effects to be felt. However, triple-bottom formations, representing declining numbers of new lows during bottoming formations, often resolve in market advances fairly rapidly after the third spike reversal has taken place. The market bottom that developed during 2002 is an excellent example.
As a general rule, the stock market prefers positive breadth unanimity during market advances: high percentages of issues reaching new highs in price, and low percentages of issues falling to new lows. (At market tops there are often high levels of issues makimg both new highs and new lows, reflective of very split market breadth. When the number of new highs and the number of new lows on the New York Stock Exchange both amount to more than 5% of the total number of issues traded on that exchange, serious market declines frequently, though not always, follow shortly.) A useful indicator that measures the level of positive breadth unanimity can be maintained by dividing the number of issues reaching new highs in price by the total of issues reaching new highs and falling to new lows. For example, if 100 issues reach new highs on a given day and 25 issues fall to new lows, you can divide 100 (new highs) by 125 (sum of 100 new highs plus 25 new lows) for a daily ratio of 30, or 80%. Single-day readings can be beneficially employed, but the maintenance of a ten-day simple moving average of daily readings smoothes the data.