Bullish Percent Index
The bullish percent index (BPI) is a market breadth indicator. The indicator is calculated by taking the total number of issues in an index or industry that are generating point and figure buy signals and dividing it by the total number of stocks in that group. The basic rule for using the bullish percent index is when the BPI is above 70%, the market is overbought, and conversely when the indicator is below 30%, the market is oversold. The most popular BPI is the NYSE Bullish Percent Index, which is the tool of choice for famed point and figure analyst, Thomas Dorsey. The bullish percent index is generally plotted on with a two-point box size. Confirming Bull Markets The bullish percent index can be used to confirm bull markets. Simply count the number of X’s in the column furthest to the right and then count the most recent column of X’s on the left after a sharp move up in the market. If the number of X’s in the column on the right are greater than the number of X’s in the left column, there is a new bull market in play.
Confirm Bear Markets
The bullish percent index can be used to confirm bear markets. Simply count the number of O’s in the column furthest to the right and then count the most recent column of O’s on the left after a sharp move down in the market. If the number of O’s in the column on the right are greater than the number of O’s in the left column, there is a new bear market in play.
Bull Market Corrections
Sharp downward moves are commonplace in a bull market. Traders can use the bullish percent index to anticipate these types of moves. If the BPI has been above 70% for sometime, and then crosses below 70%, one can expect some sort of correction in order to bring more buyers into the market.
Bear Market Corrections
Dead cat bounces occur frequently during extended bear markets. Traders can use the bullish percent index to anticipate these types of moves. If the BPI has been below 30% for sometime, and then crosses above 30%, one can expect some sort of bounce in order to bring more sellers into the market.
BPI and Moving Averages
Some traders do not like to wait for the bullish percent index to make the two-point move on the point and figure chart in order to generate a trade signal. They feel that the lag time in generating bullish and bearish calls is to long and could generate late moves. So, some sophisticated traders will plot the BPI as a line and place a 5-MA or 10-MA on the chart. These traders will sell the market if the BPI crosses below their moving average of choice, or buy when it crosses above the respective moving average. The benefit of this is that traders can receive a trade signal well before the BPI crosses above 30% or below 70%. On the flipside, if a false signal in generated, the market could continue much further in the direction of the primary trend, thus extended the trader’s losses.
Bullish Percent Index
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