Thursday, August 29, 2002 3:11:48 PM
Trading the Main Bullish Percentage Indexes
Another useful set of indicators for intermediate- to long-term trading are the so-called Bullish Percentage Indexes. Each such index indicates the percentage of stocks in a given set of stocks (exchange or index) that have Buy signals on their P&F charts.
The idea here is that when too many stocks have such signals, most of those traders who would want to buy would have bought already (because of the nice-looking charts), leading to a lack of new buyers to push the prices further up, leading to a decline. The opposite is also true - too few charts with Buy signals means that most people who would sell have probably sold already, meaning that the prices are likely to go up as the selling subsides and new buyers emmerge. In a sense, the indicator reflects inversely the probability that the group of stocks under consideration moves to the upside.
Most bullish percentage indexes are more useful for picking bottoms than for picking tops. It stands to reason to have mirror indicators - "bearish percentage indexes", indicating the percentage of stocks with Sell signals on their P&F charts. Such indicators should be more useful for picking tops than for picking bottoms. Unfortunately, I know of no charting service that supports such indicators.
1) Using the NASDAQ BPI.
One of my favorite BPIs is the NASDAQ BPI. It runs relatively smoothly (because of the large number of stocks it covers), with wide and usually well-pronounced swings. In other words - ideal for intermediate- to long-term trading.
Here is a chart of this index, with a 3-year QQQ chart above it for comparison purposes:
As you can see, I have further smoothed the indicator with a 20-day EMA and have drawn (somewhat arbitrarily) overbought and oversold levels for it. It is supposed to be traded like this - Buy/Cover when the indicator crosses above its 20-day EMA after having fallen below the oversold (green) line; Sell/Short when the indiector crosses below its 20-day EMA after having rised above the overbought (red) line.
Other possible strategies include buying or selling when the indicator respectively simply crosses above the oversold line or below the overbought line; using crossovers of the 20-day EMA with the two horizontal lines (buy when it crosses above oversold, sell when it crosses below overbought); and so on.
Note that you can move the overbought and oversold levels further apart, if you want to get signals less often and catch only the more important tops and bottoms.
2) Using the NASDAQ-100 BPI.
Another similar indicator is the NASDAQ-100 BPI. Since it covers a much smaller number of stocks, it is much "spikier" - i.e., it is more prone to making sharp moves between the overbought and oversold levels. Here is a chart of it that I use in my market analysis, complete with the corresponding 20-day EMA and overbought and oversold levels, with a 3-year chart of QQQ above it for comparison purposes:
3) Using the S&P-500 BPI.
This BPI covers the stocks included in the S&P-500 index. It is smoother than the BPI for the NDX, but less smooth than the BPI for the whole NASDAQ. Although it could be used to trade QQQ too, it is perhaps more appropriate to use it for trading the S&P-500 index instead, using SPY as a proxy:
4) Using the S&P-100 BPI.
I personally rarely use this one but it is useful to keep an eye on it for confirmation when you are expecting a major market top or bottom. Chart:
I'll cover some of the sector BPIs in another article, in order not to overload this one with too many charts.
Regards,
Vesselin
Another useful set of indicators for intermediate- to long-term trading are the so-called Bullish Percentage Indexes. Each such index indicates the percentage of stocks in a given set of stocks (exchange or index) that have Buy signals on their P&F charts.
The idea here is that when too many stocks have such signals, most of those traders who would want to buy would have bought already (because of the nice-looking charts), leading to a lack of new buyers to push the prices further up, leading to a decline. The opposite is also true - too few charts with Buy signals means that most people who would sell have probably sold already, meaning that the prices are likely to go up as the selling subsides and new buyers emmerge. In a sense, the indicator reflects inversely the probability that the group of stocks under consideration moves to the upside.
Most bullish percentage indexes are more useful for picking bottoms than for picking tops. It stands to reason to have mirror indicators - "bearish percentage indexes", indicating the percentage of stocks with Sell signals on their P&F charts. Such indicators should be more useful for picking tops than for picking bottoms. Unfortunately, I know of no charting service that supports such indicators.
1) Using the NASDAQ BPI.
One of my favorite BPIs is the NASDAQ BPI. It runs relatively smoothly (because of the large number of stocks it covers), with wide and usually well-pronounced swings. In other words - ideal for intermediate- to long-term trading.
Here is a chart of this index, with a 3-year QQQ chart above it for comparison purposes:
As you can see, I have further smoothed the indicator with a 20-day EMA and have drawn (somewhat arbitrarily) overbought and oversold levels for it. It is supposed to be traded like this - Buy/Cover when the indicator crosses above its 20-day EMA after having fallen below the oversold (green) line; Sell/Short when the indiector crosses below its 20-day EMA after having rised above the overbought (red) line.
Other possible strategies include buying or selling when the indicator respectively simply crosses above the oversold line or below the overbought line; using crossovers of the 20-day EMA with the two horizontal lines (buy when it crosses above oversold, sell when it crosses below overbought); and so on.
Note that you can move the overbought and oversold levels further apart, if you want to get signals less often and catch only the more important tops and bottoms.
2) Using the NASDAQ-100 BPI.
Another similar indicator is the NASDAQ-100 BPI. Since it covers a much smaller number of stocks, it is much "spikier" - i.e., it is more prone to making sharp moves between the overbought and oversold levels. Here is a chart of it that I use in my market analysis, complete with the corresponding 20-day EMA and overbought and oversold levels, with a 3-year chart of QQQ above it for comparison purposes:
3) Using the S&P-500 BPI.
This BPI covers the stocks included in the S&P-500 index. It is smoother than the BPI for the NDX, but less smooth than the BPI for the whole NASDAQ. Although it could be used to trade QQQ too, it is perhaps more appropriate to use it for trading the S&P-500 index instead, using SPY as a proxy:
4) Using the S&P-100 BPI.
I personally rarely use this one but it is useful to keep an eye on it for confirmation when you are expecting a major market top or bottom. Chart:
I'll cover some of the sector BPIs in another article, in order not to overload this one with too many charts.
Regards,
Vesselin
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