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Volatility and Volume Technical Indicators

How To Analyze Market Breadth: Bullish Percent

There are a few different ways to analyze market breadth, a measure of health which identifies the number of stocks rising versus falling.  Intuitively, we know that if more stocks are rising than falling then it means markets are probably going higher.  The opposite holds true for a down market. 

Yet, our current market shows some deep divergences in breadth vs. the price index, namely very weak overall breadth yet a market within 2% of all time highs.  Seemingly only a handful of stocks are carrying the markets or at least keeping it afloat.  Can it continue that way?  Not for a sustained period of time.

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The bullish percent uses point/figure buy signals to determine the number of stocks on a buy signal.  Now, backing up a bit to talk point/figure – this is simply a plot of day to day price movements without taking time passage into consideration.  It is composed of a number of columns with x’s (rising prices) and o’s (falling prices) that helps the trader identify significant support and resistance levels.  Moves beyond these points are where traders move in/out.

Back to the bullish percent.  This is more a diffusion index, which takes the point/figure analysis and diffuses out many names are on buy signals.  On a scale of 0-100, typically we find a reading over 50 to be bullish.  Currently that is the case but the NYSE has been falling for months since the peak in April of 68, so this shows underlying weakness that will eventually be paid back. 

Certainly the bullish percent can improve, but with so many stocks in this index (over 2000) it is like moving a tanker.  The Nasdaq 100 (also shown) moves with more ease but is also threatening a breakdown.

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Bad breadth has been happening for months and eventually is going to show up in poor overall market performance.  So far we have not seen big institutional outflow that would indicate a bear market is underway, but the low readings in the bullish percent should be a concern.

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