Which Direction Is The Market Heading?

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.