Bull or Bear? Measuring with the Bullish Percent Oscillator

Today we’re going to be examining the Bullish Percent oscillator, also known as the Bullish Percent line or simply as Bullish Percent. The purpose of this oscillator is to determine the percent of stocks that are showing bullish patterns versus those that are showing bearish patterns. When the market is telling you more than 50% of stocks are in bull trends, this is positive for stocks, whereas the opposite is true of less than 50% – meaning more stocks are in bear trends, a negative for stocks. Let’s take a closer look.

 

Bear vs. Bull art, by Andy Beck

 

Bullish and Bearish Patterns

 

The Bullish Percent oscillator can be applied to any group of stocks you choose, for example the Dow Components or stocks in a certain sector. At the heart of this oscillator are point and figure charts. The great thing about point and figure charts is that they offer binary evidence – that is they are one of two things: either bullish or bearish. The way the BP line is derived is by taking a basket of stocks and getting a ratio of the bullish patterns to bearish patterns.

 

A bullish pattern is defined as any double-top buy signal on a point and figure chart. A double-top buy is when a column of X’s moves higher than the previous column that came before it. In order for this pattern to signal, a reversal of at least 5 X’s must be triggered on the chart. The same is true for the bearish pattern, except double-bottom sell signals and O’s instead of X’s.  You can see from the chart of the SPY below, the last signal given was a double-bottom sell, which is still in effect as the current column of X’s has not moved higher than the last column of X’s that came before it.

 

 

The Bullish Percent Line

 

The BP Line takes the sum total of all bullish double-top buys and divides those by all bearish double-bottom sells. From this we get a ratio. The typical readings for the ratio are as follows: Above 50 is bullish for stocks, as long as the line isn’t falling towards 50. Above 70 is very bullish but may indicate a maturing trend. Below 30 is very bearish but may indicate oversold conditions.  The strongest indication a bullish percent can give is when it breaks below 70, then below 50, and then below 30 without much interruption, or from 30 to 70 in the same manner. This is typically a very clear signal that the trend has changed.

 

The chart below is self-explanatory, though I would like to point out the bearish divergences seen in 2010 and 2011 as price made a new high while the BP Line fell short twice. This is not a game changer, but it is something to pay attention to, and certainly has been a point of interest for Market Technicians.

 

Bullish Percent Candles of the Nasdaq graphed above Nasdaq price chart

 

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