I am technical trader influenced by Point & Figure (P&F) methodology.
The P&F charting takes out the time and volume out of the charts and only concentrate on discrete price movements. It eliminates day to day small price movement and shows the trends and breakouts more clearly on a chart. The column of X indicates a rising prices and a column of O indicates a falling pricing. The chart will always indicate whether the stock is either in BUY mode or a SELL mode. A BUY mode indicates if the previous columns of Os is not broken on the down side. A SELL mode indicates when the previous column of Xs is not broken on the upside. For a stock to switch from BUY to SELL or vice versa, it has to break the previous high of Xs or previous low of Os. In the chart below, the stock is in SELL mode since the column of Os is lower than the previous column of Os and the column of Xs is lower than the previous column of Xs. At the point, the stock may consolidate, print more column of Os and Xs and then breakout of previous column of X to change to BUY signal.
|P&F Buy and Sell Signals|
These BUY and SELL signals on the P&F chart can be used to construct overall health of a group of stocks such as Dow Jones Index or S&P 500. You calculate the percentage of total number of stocks with BUY signal / total number of stocks in the index. This percentage is called Bullish Percentage Index. The index will fluctuate from 0 to 100. A value of 0 means that all the stocks in the group are on SELL signal and a 100 means all the stocks are at BUY signal. One thing to remember is that just because the index is at 100 doesn't mean that the group has reached peak and it will immediately fall or if its 0, it doesn't mean that there will be an huge rally on upside. The change in the direction of the index is more important. A rise of index from under 30 or a fall from above 70 is more important in my opinion. The larger the group of stocks, the more value of the change in direction of the index.
To see the bullish percentage index of major indices, go here. Scroll down to the "Duration:" label and select "Point&Figure". Here is a chart of S&P 500 Bullish Percent Index.
|S&P 500 Bullish Percentage Index|
In my analysis, I use the Bullish Percentage Index (NYSE:BPI) to assess the overall health of the sector or an index. It helps me to enter a sector, maintain my position once I am in and also to exit the position. In my blog, I will be posting my analysis about the BPI of the various indices and sectors.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.