The Bullish Percent Index (BPI) is a market breadth indicator, and can be used to better understand what wave degree the market is most likely in. The BPI can be made rather complicated, but we can try to simplify it to make it easier to apply.
- As long at the BPI is over 70 it means 70% of all stocks in the particular index are participating in the uptrend: the uptrend is strong and here to stay.
- If it drops down below 50% followed by a move up over 70%: corrections in a bigger uptrend.
- If it drops down below 30%: larger corrections (primary wave degree and higher). 30% is used as an oversold threshold.
- Moves from below 30% to over 50% and ideally 70% signal the start of new multi-month to multi-year rallies
- Because an index or indicator can remain oversold for extended periods of time, the BPI must be oversold AND start to rise to trigger a “bull alert”: BPI must bounce at least 6%. Such signals can foreshadow a bottom in stocks. BUT, not all “Bull Alerts” result in immediate bottoms, more about that below, it’s merely and simple an alert.
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Figure 1 shows the BPI for the SPX over the past 20 years. We can observe that readings below 30 have occurred about 18 times since; not frequent, but neither seldom. Readings this low both occurred during bull markets (1998, 1999, 2000, 2011) but also during bear markets (2001, 2002, 2008, 2009). Hence, it is clear that a reading below 30 doesn’t tell us definitively if we’re in a bear market (multi-year) or in a correction within a bull market (multi-month).
Figure 1. Bullish Percent Index (BPI) for SPX last 20 yrs. (click to enlarge)
As such, and since each bull and bear market is unique with it’s own characteristics and underlying drivers I want to only look at the bull market that started in 2009 at the SPX 667 low to help deduct at wave wave degree the market currently is: see Figure 2. What we can observe first is shown in the lower left corner: at the end of the 2007-2009 bear market, the BPI started to positively diverge: price still going down, but BPI up (green line, less and less stocks participated in the decline: the correction was getting exhausted and buying started to take over). The 2nd observation is in the upper right corner, since 2013/2014 the BPI started to negatively diverge: price still going up, but BPI down (orange lines, less and less stocks participated in the advance; the uptrend was getting exhausted and selling started to take over). The BPI didn’t even reach above 70 since April 2015. This was a serious red flag for the bulls.
Figure 2. BPI-SPX since the price low made in 2009 (click chart to enlarge)
A new bull market started of the 667 price low made in 2009, and it will consist of 5 PRIMARY waves: I, II, III, IV, and V. The price low in 2011 is known as the Primary wave II low and we can observe that the BPI then dropped below 30 for the first time (yellow solid circle) since 2009. Connecting these two pieces of information, it is obvious that the Primary IV wave (similar degree) also will drop below 30. This occurred for the first time since 2011 and for the second time since 2009 two weeks ago during the late-august sell off (yellow dotted circle). Hence, the BPI adds weight to the observable evidence that the market is currently in Primary IV. Note that in 2011 the BPI made a double bottom, with positive divergence like in 2009. A similar double bottom pattern developed in 2010 (blue circle). Hence, we should expect a double bottom to form in the foreseeable future. For now, the BPI-SPX has already made a 6% point advance off i’s recent lows (the BPI-SPX bottomed at 22.40% on August 26 and reached 30.80% the following day). Hence, there is a bull alert currently. However, if we keep item #5 in mind, as well as the double bottom pattern and positive divergence, then we can reasonable expect at a (marginal) lower prie low, after a side-ways up pattern in the foreseeable future.