Bullish Percent Index can be based on P&F Charts or even a Line Chart
The Bullish Percent Index (BPI) measures the percentage of stocks in an index on Point & Figure Buy Signals, offering traders and investors a valuable tool to assess market sentiment, identify trend reversals, and uncover opportunities.
Introduction
Investor sentiment significantly influences stock market fluctuations. The Bullish Percent Index (BPI) is a breadth and/or sentiment indicator that helps traders and investors gauge the overall market strength by measuring the percentage of stocks in a given index that are on Point & Figure (P&F) Buy Signals. It serves as a proxy for market sentiment and can be used to identify potential reversals and trend shifts.
Originally developed by A.W. Cohen in the 1950s and later refined by Earl Blumenthal and Mike Burke, the BPI was first applied to NYSE stocks but has since been expanded to other indices, sectors, and asset classes.
ChartAlert, an end-of-day and 3rd party real-time-enabled desktop software, empowers traders to leverage BPI for market analysis. With dedicated features introduced in October 2023, users can integrate BPI into their technical analysis toolkit and enhance their decision-making process.
Credit: (1) Point and Figure Charting, by Thomas J. Dorsey (Wiley Trading Series); (2) Three-point Reversal Method of Point & Figure Stock Market Trading, by A. W. Cohen (Chartcraft, Inc.)
Go to the Sentiment Indicators demo videos
How the Bullish Percent Index Works
The BPI ranges from 0 to 100, with higher values indicating bullish sentiment and lower values indicating bearish sentiment.
- Above 70%:
The market is considered overbought — most stocks are in bullish patterns. - Below 30%:
The market is considered oversold — most stocks are in bearish patterns. - 50% threshold:
A key pivot level; markets are bullish above 50% and bearish below it.
The BPI updates dynamically based on Point & Figure signals:
- A stock is on a Buy Signal when a new column of X’s exceeds the previous column of X’s.
- A stock is on a Sell Signal when a new column of O’s exceeds the previous column of O’s.
Key Trading Signals from BPI
1. Confirmed Signals
- Bull Confirmed (BPI > 70%): The market is in a strong uptrend.
- Bear Confirmed (BPI < 30%): The market is in a strong downtrend.
- The trend remains valid until a 6% reversal occurs on the P&F chart.
2. Alert Signals
- Bear Alert (BPI drops from above 70% to the 60s): The market could be weakening.
- Bull Alert (BPI rises from below 30% to the 40s): A potential bullish reversal may be forming.
3. Correction Signals
- Bullish Correction (BPI falls between 50% and 70%): A correction within a bull market.
- Bearish Correction (BPI rises between 30% and 50%): A correction within a bear market.
4. Divergences
Divergences between BPI and price action can signal potential market shifts:
- If BPI declines while the market is making new highs, fewer stocks are participating in the rally — a bearish warning.
- If BPI rises while the market is making new lows, more stocks are improving — a bullish sign.
Using Moving Averages with BPI
Applying moving averages to the BPI smooths out fluctuations and highlights trends:
- Short-term traders use a 10-day moving average crossover as a buy/sell signal.
- Longer-term traders use a combination of 20-day and 50-day moving averages to confirm market direction.
Practical Applications of BPI
i. Sector & Industry Analysis
BPI isn’t limited to broad market indices; traders can apply it to specific sectors and industries to spot relative strength and weaknesses.
ii. Portfolio & Risk Management
- When BPI is overbought (above 70%), traders may reduce exposure to avoid excessive risk.
- When BPI is oversold (below 30%), traders may look for buying opportunities.
iii. Confirmation Tool
The BPI works best when combined with other technical indicators such as:
- Relative Strength Index (RSI)
- Moving Averages
- Support and Resistance Levels
- Volume Analysis
Limitations of BPI
Like any indicator, BPI has limitations and should not be used in isolation:
- Lagging Nature: BPI is based on historical price action and may not predict sudden market moves.
- No Fundamental Insights: It does not consider macroeconomic factors, earnings reports, or news catalysts.
To enhance its effectiveness, traders should combine BPI with fundamental analysis and other technical tools.
Final Thoughts
The Bullish Percent Index (BPI) is a valuable sentiment indicator that helps traders assess market strength, trend reversals, and risk levels. By eliminating noise and focusing on price action, it provides clear, actionable signals. However, traders should always use it in conjunction with other indicators and risk management strategies.
Want to integrate BPI into your trading strategy? Sign up for a paid 4-week evaluation trial of ChartAlert and gain insights into market sentiment. Start making smarter trading decisions today!