Evaluating Market Context
It's all about the context
When I talk about market context, I am often referring to a group of indicators based on what is called the Bullish Percent concept. Today, as a refresher, I'm going to go through exactly what this concept is and how it might be used.
The Bullish Percent concept was actually created by a guy named Earnest Staby in the 1940s. One of the criticisms often leveled against technical analysis is that charts, in a very general sense, look best at the top and worst at the bottom. Obviously, it would be far more valuable if charts looked their worst at the top and their best at the bottom.
The Bullish Percent concept was created to help solve this problem. It was actually A.W. Cohen who took Staby's insights and created what is called the New York Stock Exchange Bullish Percent in the mid 1950s. Bullish Percent charts are simply charts that measure the percent of "something" doing "something." Point and figure charts, such as the ones available through Dorsey, Wright & Associates, use Xs and Os; Xs to display when demand is in control, Os to display when supply is in control.
A Bullish Percent chart goes from 0 to 100%. Most orthodox bullish percent measures use 2% increments to eliminate noise. Bullish Percent charts can measure almost anything. Remember, they simply measure the percent of "something" doing "something." One of the cool things about them is that bullish percent charts have the flexibility to specify both "somethings."
For example, one can chart the percent of stocks trading above their 200-day moving average, where the "somethings" are stocks, and the 200-day moving average. Once can also chart the percent of stocks on point and figure buy signals. That's what I want to talk about here.
The NYSE Bullish Percent simply measures the percent of stocks on the NYSE that are on point and figure buy signals. The Bullish Percent tells us two important things: what team is on the field and what the field position is so we know what kinds of strategies to implement. When the NYSE Bullish Percent is in a column of Xs it tells us that the offensive team is on the field and when the NYSE Bullish Percent is in a column of Os it tells us the defensive team is on the field.
Additionally, the field position is important. There are two lines of demarcation on the Bullish Percent chart that help us determine what type of plays to run. The 30% level and below is the Green Zone, or low-risk area. When the Bullish Percent gets down to this level it tells us that most everyone who wants to sell has already sold. The availability of supply to continue to push the market lower is limited.
Conversely, when the NYSE Bullish Percent gets to the 70% level and above we are in the Red Zone, or high-risk area. When the indicator gets near the 70% level or higher, it tells us most everyone who wants to be in the market has already bought. Here, the availability of demand to continue to push the market higher is limited. The NYSE Bullish Percent does not move above 70%, or below 30%, very often. In fact, since 1955 the NYSE Bullish Percent has only been above 70% 27 times, and below 30% 19 times. The most recent instances where the NYSE Bullish Percent moved below 30% were July and October of 2002. The most recent instances where the NYSE Bullish Percent moved above 70% were December 2003, December 2004, and last week.
Today, the NYSE Bullish Percent, according to Dorsey, Wright & Associates data, is at 70%, its highest level since December 2004.
NYSE Bullish Percent (Chart courtesy Dorsey, Wright)
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