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Wednesday, June 6, 2012

Bullish percent indicator

The bullish percent indicator (BPI) is an interesting way to look at the health of the market.  This indicator uses the point and figure charting system to determine how many stocks within the selected index are in bull mode.  The basic idea is over 70% the index is overbought, and below 30% it is oversold.  Stockcharts.com has this indicator for a number of indexes.  I usually just look at the NYSE composite index for market health.

Here is an article that explains the BPI more thoroughly along with several ways to use it.

Here is the latest chart and link to it.

Currently it is under 50%, but still above the 30% over sold threshold.  What I like about this indicator is how it often shows divergences at tops and bottoms.  Before the big crash in late July/August last year the market had weakened considerably.  Notice how the 50 MA (blue line) was even sloped down sharply before the crash.  The divergence at the highs this year was not quite so pronounced, but by May 1st when the major indexes were testing the highs, this indicator was clearly headed lower.  Lets take a look at the 2007 top.

The sharp sell off in the summer of 2007 and retest of the high in Oct. of that year left a noticeable divergence in the BPI indicator.  It turned down sharply again when the market started to sell off in late Oct.
In the spring of 2008, there was a nice positive divergence in the BPI between the Jan. and March lows that kicked off a rally into May.  Lets look at how the 2002-3 low was made.

In Oct. of 2002, SPX undercut the July low while the BPI was positively divergent.  In March of 2003, SPX came within 20 points of the Oct. low while the BPI was considerably higher. That was a big divergence that kicked off quite a rally.

Last year the BPI got down under that 30% over sold threshold, but it did not in the 15% sell off in 2010.  Generally it does not spend a lot of time below 30% as buyers rush in.  Just like in 2010, not every big sell off causes the BPI to get over sold.  Between 30 and 50% it is in the gray area.  Notice in the first chart there was no divergence in the summer of 2010 at the lows.  It never got over sold and never showed a positive divergence, yet there was a big move up.  That is kind of rare for that big of a sell off not to have a more noticeable divergence.  The 50 DMA helps in those instances.  It had clearly turned up in Aug. of 2010 before the blast off in Sept.  Most of the time when it turns back up the market has bottomed.

For now we are in the gray area.  Until we get truly over sold or clearly turn back up it will be difficult to say the market has bottomed.


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The information in this blog is provided for educational purposes only and is not to be construed as investment advice.