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

 

The Aroon Indicator

“Aroon” means “Dawn’s early light” in Sanskrit. This particular indicator indicates to the technician the beginning of a new trend and early signs of an end to existing trend. Developed by Tushar Chande in 1995, the indicator measures the number of periods since price recorded a new high or new low, and therefore incorporates elements of the technical principle of peak-and-trough analysis. Tushar Chande is a CTA and principal for Tuscarora Capital Management in Chicago as well as an author of several technical trading books. You can read more about Tushar Chande here.

 

Aroon is made up of two separate indicators used in conjunction: Aroon-up and Aroon-down. Each one records the number of days since a 25-period high (Aroon-up) or low (Aroon-down). The 25-period is the default period selected by Mr. Chande, and like most indicators, this number can be tailored to meet the technician’s needs. Therefore while most momentum indicators are derived by examining price relative to time, the Aroon Indicator is unique because it examines time relative to price.

 

Specifics

 

Both Aroon indicators are bound by 0 and 100. Like RSI, readings of below 30 and above 70 are significant. A reading of 100 in one of the indicators typically signals the emergence of a new trend, and this signal is strengthened when the opposing indicator is below 30. Consistent readings between 70-100 for Aroon-up or Aroon-down indicate a strong trend. In this case it is very likely that the opposing indicator is consistently below 30. It is possible that both indicators can move down together or both move up together.

 

Interpretation

 

If both indicators are moving together, the action is dictating that the previous trend signaled by a consistent reading of around 100 Aroon may be ending. It also may signal a consolidation period where prices are bound within a range, and therefore not making highs or lows for the Aroon period.

 

If the indicators cross, this is greater confirmation that the trend that was previously indicated may be ending. Depending on your investing style, you may want to take partial profits at this point. When one indicator moves decisively above the 70 level after a cross – this is confirmation that the previous trend is more likely ending in favor of the new trend, and a reading of 100 signals a new trend. Often a cross and a reading of 100 will occur simultaneously. Consistent readings of 70-100 signals a strong trend. If both of the readings are between 30 and 70, then the halfway point at 50 is the “dividing line in the sand,” and whichever indicator is above then currently indicates trend is slightly biased in that direction, but this bias is only slight since the more important readings are 0-30 and 70-100.

 

In the chart of Ford below you can see the consolidation period beginning in May when both indicators were declining. At the end of May a new downtrend is signaled. The failure of Aroon-up to reach 100 is a warning sign that the trend has not reversed, though a trader may have already taken his profits as Aroon-down crossed below 50. Also noticed the 20-period ROC that coincides with Aroon.

 

Ford daily chart with 25-period Aroon

 

Below is a chart of the S&P Spider. You can use Aroon as a filter to stay in long-term trends. The price you pay however, is a little bit of lag time. You can see there is a one-year moving average in blue, along with a one-year ROC and one-year Aroon. The one-year Aroon was derived simply by changing the periods from 25 to 12 on a monthly chart.

 

SPY Monthly Chart with 1-year MA

 

Let us say that you are following a one-year MA as your signal for entering and exiting the market, but you don’t want to get whipsawed. This means you are willing to take on more risk in order to be more sure of the trend. If you had used the Aroon Indicator in the summer of 2010 as a filter for a new trend, you would have prevented a whipsaw in your account. Notice that even though price closed below the one-year MA twice, Aroon-down failed to signal a new trend. This is in contrast to the beginning of 2008 when a new downtrend was clearly signaled by both the one-year MA and Aroon-down. The same goes for the uptrend that developed in mid-2003.

 

Conclusion

 

Aroon can be used to anticipate and later confirm reversals in trend. It can also be used to note the weakening of trends. While you should remember that the 25-period is the default for Aroon, you can change it as you see fit. Like all technical analysis, it will be a matter of trial-and-error with careful observation, analysis, and application for you to discover what works best. Remember that unlike other momentum indicators, Aroon examines time relative to price, and therefore this unique indicator can bring a lot to the table for the astute market technician.

Tick Analysis

Ticks are important barometers of market status. They are useful in determining short-term direction. A tick is the smallest move a stock can make (.01 in most cases). In this example we examine $TICK data. $TICK is a technical indicator that records the number of cumulative stocks in the NYSE moving on upticks or on downticks at a time. If half the stocks listed on the NYSE were moving on an uptick and half of the stocks were moving on a downtick, $TICK would be 0.

 

As markets trend, so do tick patterns underneath price action. The number of stocks being bought on upticks increases as optimism increases, and the number of stocks being sold on downticks increases as fear increases. For this reason tick can be considered a sentiment indicator. It is useful knowing the direction that sentiment is moving to determine a trend versus a false move. As prices can only increase as buyers become more aggressive, and decrease when they become more eager to sell, tick is a useful and reliable indicator, albeit harder to use on a long-term basis.

 

Below is a 5-minute $TICK (NYSE Tick Data) chart with a 20-period Bollinger Band and the New York Composite charted underneath it. I have drawn linear least square regression lines along the outer bands to indicate overall trend, and I have grouped these periods into five separate groups according to breaks in the regression lines.

 

5-minute chart showing $TICK data for August 23 and 24, 2011 taken at mid-day.

You will notice how the upwards sloping linear regression lines coincide with positive periods and downwards sloping lines coincide with flat periods. This tells us two things: that the current daily trend is likely to be up, and when we should consider buying or adding to positions. Any negative changes will also alert the technician when sentiment changes so that he or she may be on the lookout to liquidate holdings or go short.

 

While the upper and lower bands do not change at the same time, the deviation of one from its linear regression line will likely cause a deviation from the second in time. Once one line deviates, look for confirmation of the other line as a new tick trend may be developing. You should also recognize that because of this, it may difficult to determine the exact time when sentiment changes. The experienced technician forms his initial analysis when he marks a possible change in trend, and then looks for confirmation as time progresses to validate his analysis. The reason for this is that tick indicators do not turn on a dime, as one trend slowly morphs into the next.

 

Update 8/24/11 4:11pm

 

Below is the same chart updated for end of day data on the $TICK and $NYA. Notice how the positive sentiment trend continued, and how one might find different ways of analyzing the same data with similar results.

 

The same 5-minute chart updated for data through the close.