ANOTHER LOOK AT BULLISH PERCENTAGE READINGS -- DOW AND S&P TEST MAJOR SUPPORT -- NASDAQ IN DOWNTREND
FIRST A LOOK AT THE NYSE COMPOSITE INDEX ... Every time I write about a certain stock market index, I'm asked why I don't write about some of the others. I generally try to spread my coverage around to all the major stock indexes, but can't cover them all at once. I also try to find the one that's giving the truest read on the overall market. Yesterday, for example, I used the S&P 500 for an in-depth market view and came up with a mixed picture. If I had chosen the Nasdaq, I would have a gotten more negative reading. If I had chosen the NYSE Composite Index, I would have come up with a slightly more positive read. Chart 1 shows part of the reason why. The NYSE is the only one of the major market indexes that stayed over its 200-day moving average in late April. Considering that most of those indexes are now back above their 200-day lines, I'd have to say that the NYSE may have given the most reliable reading. I decided to focus on the NYSE today and to re-introduce some point & figure charts. I'm going to revisit the Bullish Percent Indexes on the major market averages which also utilize point and figure charts.
Chart 1
Chart 2
NYSE STOCK BETWEEN SUPPORT AND RESISTANCE... Chart 1 shows that the NYSE Index is trading in a short-term neutral area between support at its 200-day moving average (red line) and resistance at its 50-day (blue line). That's essentially the same pattern I showed yesterday for the S&P 500. Chart 2 is a point & figure chart of the NYSE. It's a three-box reversal chart with each box valued at 25 points. The x columns represent rising prices while the o's show falling prices. A sell signal is given when a o column falls below a previous o column. A sell signal was given in March at 7200. [The red numbers mark the start of a new month]. The last signal given was a short-term buy at 70.75. The rising blue line is a long-term support line (which is drawn at a 45 degree angle). The p&f chart simply tells us that the NYSE is attempting to bounce off long-term support. Chart 3 just below shows the Bullish Percent Index for the NYSE.
Chart 3
HOW TO READ BULLISH PERCENT INDEX ... The NYSE Bullish Percent Index ($BPNYA) is determined by dividing the number of stocks in the NYSE that are on p&f buy signals divided by the total number of NYSE stocks. [That formula can be used for any other stock index and stock group.]. There are a few simple rules to keep in mind. The best signals take place when the BPI turns down from overbought territory over 70 (a sell signal) or turns up from oversold territory under 30 (a buy signal). At those extreme levels, a turn of 6% (three boxes) is enough to generate a signal. An actual p&f buy or sell signal (when a previous column of x's or o's is exceeded) is even stronger. Chart 3 shows a traditional sell signal given in the NYSE BPI last May when it fell below a previous o column at 70. A second sell signal took place this March (red number 3), when it fell three boxes from above the 70 level. The NYSE BPI is now testing last year's low at 54. A fall to 52 would resume its downtrend. An upside three box reversal to 60 would turn its short-term trend back up again. The 50 level is also important. A reading over 50 keeps the index in an uptrend. A drop below 50 usually signals a more serious downtrend. That puts the NYSE at a critical juncture, which confirms what Charts 1 and 2 are saying. Let's look at the other major indexes.
BPI READINGS FOR MAJOR STOCK INDEXES ... The Market Summary page on Stockchart.com lists the BPI numbers for all of the major stock indexes and major sectors (See Bullish Percent Indices) -- and the ability to chart them. The next three charts are plotted through today (Friday's) close. All three are currently in downtrends (the o column). Charts 4 and 5 show similar BPI readings for the Dow and the S&P 500. The Dow BPI ($BPINDU) gave a recent sell signal in April (4) from above the 70 level. It's now at 50 which is a significant test of its long-term uptrend. A drop to 46 would break last year's low at 48 and push it below 50. That would be negative. The BPI for the S&P 500 ($BPSPX) suffered a downside three-box reversal (a sell signal) in January (1) from above the 70 level. It's now at 52. A drop to 46 would break last year's low and push it into a deeper downtrend. That places the S&P in an important long-term test as well. The Nasdaq BPI is the weakest of the major stock indexes.
Chart 4
Chart 5
Chart 6
NASDAQ IN DOWNTREND... Chart 6 shows the Nasdaq BPI($BPCOMPQ) giving a sell signal from above 70 in March 2004. It suffered another downside three-box reversal in January of this year (1) at 54 and fell below 50 in March (3). It has fallen to 38. That puts the Nasdaq in bear market territory. The only good news is that the Nasdaq is the closest to major oversold territory under 30. Chart 6 shows that virtually all of the buy signals given over the last five years (years are shown along the bottom) took place from below 30. A buy signal can take the form of an upside three-box reversal -- or a more traditional buy signal when a column of x's exceeds a previous x column. The last time the latter happened was October 2002. Another upside three-box reversal took place in April 2003. Neither type of buy signal is visible at present.
GUIDELINES FOR USING BPI CHARTS... The best signals occur from over 70 or under 30. [The recent sell signals took place over 70]. Traditional p&f buy and sell signals are the strongest type. But three-box reversals often signal market turns -- especially if they occur near key market levels. Those signals that occur near the middle of the chart (near 50) usually aren't the start of major trends. Signals on the BPI charts aren't meant for short-term trading and should always be used in conjunction with other technical indicators. Right now they're telling us that the trend is down in all of the averages. The Nasdaq is the only one in a long-term downtrend. It's the closest to oversold territory under 30, but hasn't given any BPI buy signals yet. The Dow, the NYSE, and the S&P 500 are testing support around 50.
