Day Trading & Forex Forum

Many members of Trade2win are well informed on the latest moves in the FTSE 100 from the many excellent online resources the private trader now has at his disposal supplying live (or nearly live!) prices plus a host of other statistical information on indices. Less obvious is what is causing the move. Is it a large number of constituent stocks all heading in the same direction, or just a few index heavyweights making their influence felt? This measurement of the degree of participation within an index move is known as “market breadth” and is an important tool for identifying the strength of a move and medium-term overbought/oversold conditions.

Investors Intelligence developed their “bullish percentage” indicator in the US in 1950s. This indicator measures the number of stocks displaying uptrends, as defined by II’s point and figure charting methodology and has been widely adopted by the US investment community, but to date remains less known as a tool in Europe and the UK.

The US Approach

The first breadth indicator, the NYSE Bullish Percentage, was developed by Abe Cohen, the founder of Investors Intelligence in 1955. He was an early pioneer of point & figure (p&f) stock charts and this approach, which divides stocks into bullish or bearish trends, has the distinct advantage of providing a objective view of a stock’s technical charateristics . This provided the ideal building blocks for a market barometer and Cohen took the logical leap that by calculating the percentage of bull trends amongst the constituent stocks of the NYSE Index, he would have an accurate picture of the supply/demand relationship for the market as a whole. For example, if there were 2000 stocks in the NYSE Index and 1000 of them were on bull signals, then the Bullish % would be reading 50%.

As it turned out, not only did the NYSE Bullish % identify periods when the bulls were in the driving seat i.e. the best time to own stocks, but it also proved to be a one of the best contrary indicators for calling intermediate market tops and bottoms.

Cohen studied the pattern of this long-to-medium term oscillator and drew up the following guidelines for its use:

• Low risk area below 30%: Almost everyone who wants to sell has already sold. Once the indicator starts moving up from this area (indicated by reversals on the p&f chart of the bullish %) it is time to start accumulating growth stocks and to attempt bottom-fishing in stocks at multi-year lows.
  
• Mid-range: When the indicator moves up into mid-field, continue the bullish approach but buy more selectively in stocks with strong relative strength. Begin to take profits in recovery plays and holdings with weak relative strength. Buy new positions on pull-backs.
  
• High risk area above 70%: When the action starts moving down from this area (indicated by reversals down on the p&f chart of the bullish %) it is time to initiate defensive tactics. Sell any laggards (with weak relative strength). Begin to tighten stop losses on all holdings. Focus new positions in defensive/lower beta sectors. Buy call options instead of stock to limit equity exposure.

Abe Cohen’s original strategy for the bullish percentage was to be bullish on readings above 52% and bearish below 48%. However, as time went by, and the back history of breadth data built up, improved applications of this indicator were introduced. Earl Blumenthal’s book “Chart for Profit”, published in 1975, introduced a series of rules to be applied to the point & figure chart of the NYSE Bullish % or the “Bullish Bearish Index” as he referred to it. The rules were further refined by Mike Burke in 1982, when he became editor of Investors Intelligence, and remain to this day the recognised method of applying breadth to market strategy.

There are seven market conditions that can be derived from the point & figure chart of the NYSE Bullish % which are as follows

Definitions of Current Market Breadth Status