Section 10:
Bullish Percent Index Buy and Sell Signals, Plus Overbought and Oversold Readings
The bullish percent index is one of the most effective broad market indicators. It’s extremely accurate and reliable.
The index is calculated by first counting the number of stocks on buy signals according to the point and figure method. The index then takes the number of stocks on buy signals and divides by the total number of stocks in focus. The raw value of the index is a percentage of stocks on buy signals. Values for the bullish percent index range between 0 and 100 percent, where 0 indicates that all stocks in the index are on sell signals and 100 indicates that all stocks in the index are on buy signals.
The bullish percent index can be calculated for any group of stocks such as the Dow Jones Industrial Average, NASDAQ-100, Russell 2000, or any custom grouping of stocks. For the sake of consistency, we use the bullish percent for the NYSE Composite ($BPNYA) when scoring the Market Situation.
The indicator is traditionally charted on a point and figure chart. But for the sake of simplicity, we use a line chart to display the value of the index. To make the bullish percent even simpler to score, we apply a 5-day simple moving average to the raw index value. The moving average helps to create an easy-to-follow set of rules.
Bullish Percent Index Scoring
The Bullish Percent Index gets a score of +1 if the value of the 5-day simple moving average is greater than yesterday’s value. (See Figure 10.17)
Figure 10.17
The Bullish Percent Index gets a score of 0 if the value of the 5-day simple moving average is less than yesterday’s value. (See Figure 10.18)
Figure 10.18
Bullish Percent Index Overbought and Oversold Signals
The bullish percent index is an extremely effective tool for spotting oversold and overbought conditions in the market. It can be applied when trading bullish and bearish reversal patterns. When looking for oversold and overbought conditions in the index, don’t use a moving average. Simply look at the raw value of the index.
The oversold and overbought readings don’t impact the scoring of the Market Situation. But it’s very much worthwhile to look for these conditions and find the appropriate reversal patterns during periods of extremes in the index.
The bullish percent index is oversold when it falls below 30. This is the time to start looking for bullish reversal patterns. The indicator can go lower than 30, however, so it’s important to wait for confirmation before entering several bullish reversal patterns. Confirmation comes when the bullish percent index crosses up through the 30 percent level. (See Figure 10.19)
Figure 10.19
The bullish percent index is overbought when it rises above 70. This is the time to start looking for bearish reversal patterns. The indicator can go higher than 70, however, so it’s important to wait for confirmation before entering several bearish reversal patterns. Confirmation comes when the bullish percent index crosses back down through the 70 percent level. (See Figure 10.20)
Figure 10.20