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Bullish Percent is a Good Barometer of the Market

10/22/02 01:58:58 PM
by Kevin Hopson

The bullish percent is the percentage of stocks that are on buy signals at any given point in time. By watching for certain patterns, investors can interpret what type of market - bull or bear - we are in before it is too late.

Security:   BPOIL
Position:   Accumulate

The bullish percent is the percentage of stocks that are on buy signals at any given point in time. A buy signal is given when a stock exceeds a prior high. However, to stay on a buy signal, a stock must not breach a prior low, as this would end up giving a short-term sell signal. Though the New York Stock Exchange (NYSE) bullish percent is the most commonly used, as it gives a broad measure of the market, investors can utilize sector-specific charts as well. For example, I always keep a close eye on the oil sector, as I tend to follow this part of the market more than any other. As you can see in the chart, which details the bullish percent for the oil sector, there were a number of clues over the last two years that could have helped investors gauge which way the sector would move. However, investors must first understand how to read the bullish percent chart before they can interpret it.

The most important levels to watch are the 30 percent and 70 percent levels. For example, when the bullish percent moves above the 70 percent level, the sector is considered to be overbought. This means that there is limited upside potential and significant downside risk for investors. On the other hand, if the bullish percent moves below the 30 percent level, the sector is considered to be oversold. This means that there is significant upside potential and limited downside risk for investors.

Graphic provided by: Excel Chart - Data provided by Dorsey Wright & Ass.
However, just because the bullish percent moves above or below one these levels does not constitute a buy or sell signal. Instead, one must interpret the pattern that follows. For example, if you look at the left-hand portion of the chart, you will notice that the bullish percent moved above the 70 percent level and then reversed down. This gave a "Bear Alert" signal. If the bullish percent had pulled back but continued to stay above the 70 percent level, it would have signaled a simple bull correction.

This was not the case though. Instead, the bullish percent moved below the 70 percent level and breached its prior low. As a result, the oil sector was in the early stages of a confirmed bear market. Though the bullish percent proceeded to move back above the 70 percent level soon thereafter, it did not exceed its prior high. If it had, the bulls would have taken over again. Unfortunately, the declining highs signaled a bear correction and the longer-term bear market ensued.

If you look at the middle portion of the chart, you will see that the oil sector eventually bottomed out. When the bullish percent moved above the 30 percent level and exceeded its prior high, it signaled an end to the bear market. This leads us to the current situation (right-hand side of the chart). More specifically, the bullish percent recently moved above the 30 percent level, giving a "Bull Alert" EE signal in the process. Since the bullish percent has yet to exceed its prior high, the oil sector is not in a confirmed bull market. If and when this occurs (bullish percent hits 34 percent), it would be an opportune time for oil sector investors to go long. Though I recommend accumulating shares of oil stocks in the near-term, I would change my view of the sector if the bullish percent reversed back down to the 26 percent level. The reason being that a continuation of the current bear market would be confirmed.

Kevin Hopson

Kevin has been a technical analyst for roughly 10 years now. Previously, Kevin owned his own business and acted as a registered investment advisor, specializing in energy. He was also a freelance oil analyst for Orient Trading Co., a commodity futures trading firm in Japan. Kevin is currently a freelance writer.

Glen Allen, VA
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Comments or Questions? Article Usefulness
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Date: 10/29/02Rank: 2Comment: Many of us have software that can generate RSI, oversold/over bought curves and others but I have no data for Bullish Percent . Why not put in terms I can use.
Date: 10/29/02Rank: 4Comment: Is there a website that has the bullish percent for the NYSE? How about for the S P 500 and the Nasdaq? Thanks, Brian
Date: 10/29/02Rank: 5Comment: 
Date: 11/30/02Rank: 3Comment: 

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