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April 16 2012| Filed Under Active Trading, RSI, Technical Analysis
There's no shortage of directional indicators available to an aspiring market
technician: moving average ribbons, moving average convergence/divergence and
its cousin, the MACD histogram, relative performance, the relative strength
index; on-balance volume, William's Acc/Dist and the list goes on. However,
when is it time to use a directional indicator, and conversely, when should
technical analysis turn to oscillators like stochastic or Williams %R? The easy
and under-used NYSE Bullish Percent Index gives concrete answers to these
questions while providing a jumping off point for further, well-directed
analysis of a particular industry or stock. It is the first step in formulating
a winning strategy for trading and investing.
NYSE Bullish Percent Index
The NYSE Bullish Percent Index was invented by the estimable market technicians
at Chartcraft in 1955 (now known as Investors Intelligence). The NYSE Bullish
Percent Index is calculated by reading either a buy or a sell signal from the
point and figure chart of each of the 2,800+ stocks on the NYSE each evening.
(For a review of the P/F technique take a look at this article on
Stockcharts.com.) The value of the index represents the percentage of stocks
listed on the NYSE that signal a buy. For example, if 2,100 stocks signal buy
and 700 signal sell, the value of the NYSE Bullish Percent Index is 75. Since
it incorporates every NYSE-listed company, it is easy to see how useful this
index can be.
Bullish Percent gives buy and sell signals just like any other point/figure
chart. In fact, the chart of Bullish Percent is always in one of six phases.
These six phases determine the underlying market condition and therefore
indicate an appropriate trading strategy. Below are the six phases and an
explanation of the associated market strategy. Remember, the index is always in
only one of the phases.
Bull Confirmed - Bull confirmed is, just as it sounds, the most bullish signal
the index emits, giving traders a green light to take on multiple long
positions with confidence. In the bull confirmed phase, the Bullish Percent
Index has a column of X's on its right edge, and this column must have
surpassed the next column of X's over to the left by at least one square. Since
a market that is in bull confirmed mode is upwardly trending, directional
indicators such as MACD are more appropriate than oscillators during this
phase.
Bear Confirmed - Again, just as it sounds, the bear confirmed phase is the most
bearish signal the index gives. In this mode, the Bullish Percent Index has a
column of 0's on the far right edge of the chart, and this column must surpass
the next column of 0s to the left by at least one square down. Since a market
in the bear confirmed mode is trending downward, only short positions should be
considered during it, and directional indicators are again the weapons of
choice.
Bull Correction - The bull correction mode, following only a bull confirmed
phase, is a sideways market or a market experiencing a correction after a bull
confirmed phase. The chart features a column of 0s on the right edge that has
yet to pass the last 0's column. Long positions should be taken with caution,
because a bull correction can reverse into a bear confirmed. During the bull
correction mode, look to oscillators like stochastic for insight into timing
trades.
Bear Correction - A market in the bear correction phase, following only a bear
confirmed phase, is also a sideways market, and it is experiencing a correction
from bear confirmed. A bear correction features a column of X's on the right
edge of the chart that fails to surpass the last column of X's. Again, use
short positions with caution, and use oscillators instead of directional
indicators with the charts.
Bull Alert - The final two phases of the Bullish Percent Index involve
overbought or oversold conditions. On the Bullish Percent chart, readings above
70% are considered overbought, and readings below 30% are considered oversold.
The bull alert phase is simply a reversal into a new column of X's from below
30% on the chart, and it indicates that the index is oversold and due for a
bounce. As soon as the index signals a bull alert, traders can take long
positions with caution until the X's cross back above the 30% line.
Bear Alert - A bear alert is simply the opposite of a bull alert, except to
signal a bear alert, the index must be crossing below the 70% line with a
column of 0s. It is important to remember that for a bear alert to signal, the
column of 0s must actually cross back below the 70% line. During a bear alert
the market is overbought and due for a sell-off. Take short positions with
caution until the market reverts back to bull confirmed. During Alert phases,
it is a good idea to take quick profits (10-15%) because there is a good chance
the market will reverse.
Here are some charts showing each of these phases:
Now that you have an idea of how to read the NYSE Bullish Percent Index, take a
look at the actual chart and see if you can tell what phase the market is in
from this daily chart on the Investor Intelligence website.
To further refine your trading strategy, try also using the economic sector
Bullish Percent indices, which can be found at stockcharts.com. These graph a
chart identical to the NYSE version, except they are focused on the stocks in
each individual sector. By narrowing in on which sectors are giving a bull or
bear signal, you can target the most profitable segment of the market at any
time.
The Bottom Line
For more on this trading approach, check out the book "Point & Figure Charting"
by Thomas Dorsey. Dorsey explains in great detail how to use the Bullish
Percent, along with many other market breadth indicators, to fine-tune your
market strategy.
by Chris Stone