Technically Speaking Archives
Technical Indicators & Overlays
In January, I wrote about point & figure charting, a personal favorite of mine when it comes to chart analysis. This unique chart type ignores the “noise” of the market that is most responsible for short-term price movements and instead focuses on “meaningful” price activity. Beyond discussing the basic principles of point & figure charting, including how to create them by hand if you so choose, I also covered how you can use point & figure charts to identity trendlines and areas of support and resistance. For those interested in learning more about point & figure charting, the January article is a good starting point.
In this installment of Technically Speaking, I examine the Bullish Percent Index (BPI). This breadth indicator is based on point & figure charts, specifically the number of stocks on point & figure buy signals (more on this in a moment) within an index. The BPI was developed in the 1950s by the then-editor of ChartCraft, which later became Investor’s Intelligence. Originally applied to the NYSE Composite Index, the BPI can be used for virtually any group of stocks—an index, sector, industry, etc.
As mentioned earlier, the Bullish Percent Index is based on the number of stocks on point & figure (P&F) signals within a given index, such that:
BPI = (Number of stocks on P&F buy signals ÷ Total number of stocks) × 100
P&F Buy/Sell Signals
A discussion of P&F signals is worthy of its own article, so for the sake of this discussion we focus on the two that form the cornerstone of the BPI: the P&F buy and sell signals. It does not matter what security or index you are analyzing, it is a point & figure buy or sell signal. There is no ambiguity.
P&F Buy Signal
A basic P&F buy signal is triggered when a bullish X-column exceeds the high of the previous X-column, as shown in Figure 1. This is, in effect, a double-top breakout.
P&F Sell Signal
In contrast, a P&F sell signal occurs when a bearish O-column falls below the low of the previous O-column (Figure 2). In this case, it is a double-bottom break.
Plotting the BPI
StockCharts.com is my go-to site for charting and technical analysis. One reason for this is that it is one of the few sites that offers point & figure charting. In addition, it tracks the BPI of several indexes as well as sector and industry groups.
Based on our explanation above, the BPI tracks the percentage of stocks in an index, industry, sector, etc., whose point & figure chart is currently in a bullish X-column that rises above the high of the previous X-column. It does not matter where the current price is in relation to that X-column. As long as the price is still in a bullish X-column that rises above the previous X-column, the stock is on a point & figure buy signal.
At the end of each trading day, StockCharts calculates the BPI for the various indexes, sectors and industries and plots the value on a point & figure chart. Furthermore, the BPI point & figure charts use traditional three-box reversals and box sizes of 2%.
Figure 3 is the BPI for the NYSE Composite Index ($BPNYA), which is one of the indicators we also track on the CI Market Dashboard. X-columns indicate a rising BPI and O-columns indicate a falling BPI. Each X and O represents 2% for the BPI, so using three-box reversals, it takes a 6% move in BPI for a reversal (three boxes at 2% equals 6%, or 3 × 2% = 6%). An O-column can only reverse to an X-column by a 6% advance in BPI. Likewise, an X-column can only be reversed to an O-column with a 6% decline in BPI. (To better understand the behavior of point & figure charts, you may wish to read our January article).
Since the Bullish Percent Index measures the percentage of stocks in an index, etc., that are on a point & figure buy signal, the BPI ranges from 0% to 100%. The volatility of BPI for the underlying group of stocks is dependent on the number of stocks used to calculate the BPI. Indexes composed of a smaller number of stocks are more apt to reach the 0% or 100% extremes compared to indexes made up of thousands of companies. In addition, indexes with smaller numbers of stocks generally have BPIs that are more volatile because it takes fewer stocks to move the BPI.
Generally speaking, the bulls are in control when the BPI is above 50%, whereas the BPI favors the bears when it is below 50%. However, technicians view the BPI as being oversold when it falls below 30% and in an overbought condition when it rises above 70%.
However, several BPI signals have evolved over the years. These include:
- Bull Alert: BPI is in an O-column below 30% and reverses to a new rising X-column
- Bear Alert: BPI is in an X-column above 70% and reverses to a new falling O-column
- Bull Confirmed: BPI is on a P&F buy signal and in a rising X-column
- Bear Confirmed: BPI is on a P&F sell signal and in a falling O-column
- Bull Correction: BPI is on a P&F buy signal but in a falling O-column
- Bear Correction: BPI is on a P&F sell signal but in a rising X-column
Bull alert signals mark a possible market bottom. Selling pressure has driven the percentage of stocks in an index on a P&F buy signal to below 30%, indicating a possible oversold condition. It is not uncommon for an index or indicator to remain oversold for an extended period of time, so we look for an upswing in BPI to trigger a bull alert. This upswing takes place in the form of a 6% rise in BPI and the shift to a new rising X-column. Bull alerts signal that breadth in the index is improving after reaching oversold conditions and may foretell a bottom in stocks. However, a bull alert is not a buy signal. In addition, keep in mind that not all bull alerts mark a bottom, but they do indicate that conditions are improving.
The green arrows in Figure 4 indicate where the NYSE Bullish Percent Index ($BPNYA) is in a declining O-column that falls below 30% and then shifts to an advancing X-column following a 6% upward reversal. The first arrow at the far left of the chart marks the bull alert that was triggered after BPI dropped to 4% in October 2008, at the height of the financial crisis. Between late August and October, the S&P 500 index dropped roughly 35%. This was an intermediate market bottom, as the market rebounded briefly and then moved sideways for a few months before finally hitting the ultimate bottom in March 2009. Thus began the six-plus-year bull market that we are still in the midst of. The fourth arrow from the left shows the bull alert that was triggered by the March 2009 market reversal.
In contrast to a bull alert, a bear alert marks a possible reversal from an overbought condition. Buying pressure has pushed over 70% of stocks in an index to a P&F buy signal. When BPI reverses three boxes (6%) to form a new falling O-column, this triggers a bear alert. Again, a bear alert is not a sell signal. It is an alert, however, that the upward trend may be ending and that a decline may occur.
The red arrows in Figure 4 show where BPI is in an advancing X-column that rises above 70% and then reverses downward 6%, shifting to a declining O-column. The red arrow furthest to the right shows where BPI climbed to 74% in July of last year before reversing and falling to 40% in October. Over the period, the S&P 500 lost roughly 6%.
A bull confirmed signal occurs when BPI itself is on a P&F buy signal and in a rising X-column. This action serves as confirmation of the P&F buy signal. Remember that a P&F buy signal takes place when the current rising X-column is higher than the previous X-column. Essentially, BPI is attaining a higher high. The P&F buy signal stays in effect until BPI reverses to a falling O-column and that O-column falls below the lowest level of the previous O-column, triggering a P&F sell signal. Each time BPI shifts to an O-column that does not fall below the low of the previous O-column and then back to an X-column that rises above the high of the previous X-column, a new bull confirmed signal is triggered.
Figure 5 shows the $BPNYA with a bull confirmed signal. A buy signal was trigged when BPI broke above its previous high in January 2012, eventually rising to 78%. Between April and May, BPI reversed to a declining O-column and fell to 46%, which matched the low of the previous O-column. Because it did not fall below the previous low, the P&F buy signal remained in effect. By the end of December, BPI had once again shifted to a rising X-column. With the P&F buy signal still in effect, this triggered a bull confirmed signal on December 20, 2012. The status for the BPI is at the top left of the chart.
The bear confirmed signal does just that—confirm the underlying P&F sell signal that is in effect with BPI being in a falling O-column. In this scenario, the BPI is on a P&F sell signal because it is in a falling O-column that has fallen below the lowest level of the previous O-column (a lower low). The P&F sell signal remains in force until BPI reverses to a rising X-column that also rises above the highest level of the previous X-column.
Figure 6 shows a bear confirmed signal for the NASDAQ Composite Bullish Percent Index ($BPCOMPQ) in 2005. In March 2004, BPI fell below its prior low to trigger a P&F sell signal. From there, BPI fell to 34% by August. As long as any advancing X-column did not rise above its previous high, each successive O-column triggered a bear confirmed signal, of which the latest on the chart took place on October 7, 2005, as indicated at the top-left of the chart.
Whereas the bull and bear confirmed signals add weight to the underlying trend in BPI, the bull and bear correction signals “contradict” the bigger trend currently underway in BPI. A bull correction signal is triggered by a declining O-column when the BPI is on a P&F buy signal. To reiterate, the buy signal will stay in effect as long as the O-column does not fall below the lowest level of the previous O-column. Until this happens, the bull correction is in effect as long as BPI is in a buy signal and in a declining O-column.
In Figure 7, we see a bull correction signal with the DJIA Bullish Percent Index ($BPINDU). In May 2014, BPI broke through resistance, triggering a P&F buy signal. BPI eventually rose to 90% before reversing into a declining O-column on August 12, 2014. This shift to an O-column while the P&F buy signal was still in effect triggered the bull correction signal.
The last signal we will discuss here is the bear correction. It occurs when the Bullish Percent Index is on a sell signal but in a rising X-column. Advances in BPI, as illustrated by a rising X-column, are a bear correction as long as the X-column does not exceed the high of the previous X-column.
Figure 8 shows a bear correction signal for the S&P 500 Bullish Percent Index ($BPSPX). The Bullish Percent Index broke support in October 2014, triggering a P&F sell signal. The two subsequent rising X-columns have failed to surpass the prior high, keeping the P&F sell signal in place. These rising X-columns are corrections within a bigger downtrend. When the BPI shifted to another rising X-column on February 6, 2015, it triggered a bear correction signal.
The Bullish Percent Index is a multipurpose indicator based on one of the more interesting chart types. With it, you can identify possible overbought (70%) and oversold (30%) conditions, as well as possible market tops and bottoms when BPI reverses from these extremes.
Trend followers can use movements in BPI above and below 50% as possible triggers of reversals. BPI can also offer confirmation of the current bullish or bearish trend.
Finally, traders use BPI to define a trading “bias” in the market before deciding on individual trades. Buy signals are preferred when the BPI favors the bulls (i.e., is above 50%), whereas sell signals are preferred when the Bullish Percent Index favors the bears (is below 50%).