There are numerous indicators capturing the overall market-breadth such as Advance-Decline, New 52-high/low, % of stocks above a particular moving average to name a few. While these are popular among the breed, I wanted to discuss something which is not so popular but quite effective one: Bullish Percent Index.

This index was popularized (as far as I am aware) by Thomas Dorsey of www.DorseyWright.com. The index captures the percentage of stocks which are in a buy-mode based on the Point & Figure chart. The beauty of Point and Figure chart is that, any given stock or instrument will always be either in a buy or a sell mode, depending on the most recent signal triggered. There is no room for confusion here !

So, the Bullish Percent Index is nothing but the percentage of stocks that are in a buy-mode in the Point & Figure Chart. This percentage is plotted as a Point & Figure chart with a typical 2-points X 3-box reversal criteria. In order to decide if a stock is in a buy or sell mode, I have used 1% box size and a 3-box reversal. Based on this, the Bullish Percent Index is calculated and featured below.

Notice how the extremes of the turns in the Nifty are captured by corresponding extreme reading and sell-signal in the Bullish Percent Index chart.

How does one interpret the chart?

Any reading above 70 is traditionally considered overbought and below 30 is oversold. Let’s understand the logic here. A reading of 70 indicates that 70% of the stocks are in a buy-mode. When 70% of the stocks are in a buy-mode the scope for further demand to sustain the rally and move to higher levels would be diminished to a large extent. But, any reading above 70% does not necessarily mean market has topped out and it is time to sell. One has to wait for a sell signal at the upper extreme or a buy signal in the lower extreme in the Bullish Percent Index chart to indicate that a reversal or at least a sizeable counter-trend correction is round the corner.

For the sake of clarity, a buy signal in the Point & Figure chart is triggered when a column of “X” moves above the high of the immediately preceding column of “X”. Similarly, a sell signal is triggered when a column of “O” falls below the low of the immediately preceding column of “O”.

If you look at the chart above, the index is now at little over 84 which means that about 84% of the stocks traded at the NSE is in a buy mode. This means the index is well into the overbought territory. But, a sell-signal has not been triggered. So, one needs to be careful and play “defensively” and not get aggressively long. This is the message conveyed by the Bullish Percent Index chart.

Notice how the indicator was in the overbought territory ahead of the Brexit event and cautioned us not to buy aggressively. There was a sell-signal in the chart but that got reversed quickly even before the index could drop below the half-way or the 50% mark.

Also look at how this index behaved ahead of the 2008-crash. It was well past the 70-mark in December 2007 and after the sell signal was triggered, it was a whitewash. The point is one does not know how serious a reversal off the 70-mark would be in terms of price damage. So, it always pays to be cautious and load up on long position when the index reverses off the oversold region.

Let’s wait and watch how relevant the current cautionary-signal turns out to be.

I have used the charting software from www.updata.co.uk for the Bullish Percent Index chart. I am not aware of any other software which offers this facility. If anyone is aware of other charting platform offering this feature,  please mention it in the “comments’ section below.

I am also not aware of any site that publishes or features this chart for Indian markets. Again, please do educate us of such sites if anyone is aware. Share the website url in the comments section.

The popular site www.stockcharts.com offers Bullish Percent Index for US stocks but not for Indian ones. Hope they provide this soon.

This post is by no means an exhaustive literature on the subject. The purpose of this post is to initiate readers to this wonderful tool. I would instead like to direct you to checkout articles at www.stockcharts.com and the book on Point & Figure charting authored by Thomas Dorsey. Also checkout the site www.DorseyWright.com for additional literature on the subject.

Just wanted to share an interesting anecdote which was narrated by my good friend. My friend, T.P.Kumar (twitter handle @traderindian) is an avid-reader of books across a variety of subjects ranging from trading psychology to fiction to mythology. He runs into a book store couple of days ago and his eyes were immediately drawn to a book on trading psychology. He checks the price and it is Rs.599. He immediately recalls having seen this book priced at Rs.2,000-2,500 (converting it to INR terms from USD) and decides to go ahead and buy the book.

So far so good. After buying the book he gets back home and after enough deliberation, musters courage to check the price of the same book at amazon.in. To his surprise, the same book was available about Rs.200 cheaper at Rs.370. He sulks and his daughter tells him “you could have checked the price at amazon.in before making this decision to buy”

Even before reading the first few pages of that book on psychology, my friend gets a nice lesson on psychology. He realizes that his decision making was guided by impulse and instant-gratification while the decision to buy via amazon (a cheaper alternative) would have resulted in delayed-gratification. The urge here was to buy the book and not buying it at a better price. More importantly, he did not have any plan of action which is fine in this case as the opportunity-loss was negligible.

Wonder how many of you can draw a parallel between this anecdote and the decision we make while taking a trade / investment. Often times, we have a well articulated trade-plan but things do not pan out as per the plan. We sit in front of the screen and the constantly moving ticker lures us to believe that we should take the trade right now. As always, we do end up taking the trade even without realizing that we had a plan of action to adhere to.

Am sure, most of us know what happens next. We end up executing the trade at the worst possible location and then realize that there was a trading plan. By the time these events pan out and the postmortem is done, the trade is already in the red. We decide to scratch the trade immediately and this invariably happens at around the levels where we ought to be entering the trade as per the original plan.

Sounds familiar. The behavior in both instances – buying the book and executing the trade – is driven by impulse where rationality takes a backseat. That is the reason why trading plan is of importance. But what is more important is to stick to the trading plan.

So, rather than staring at the screen all day long, put in the “alerts” in your trading screen. You need to pull the trigger only when the an alert pops up on the screen. Until then there is no point staring at every single tick.

PS: As I am still undecided about entertaining guest-posts in this blog, I decided to narrate this incident. For all practical purposes, you may treat this as a post written by my friend @traderindian. My contribution to this is just putting a verbal-structure to the experience of Mr.T.P.Kumar.

It has been a good three-months since I did my previous Nifty update. Nice that we have survived another quarter and more importantly a few high profile “exits” including Brexit, Rexit and for the football fans – Messi. Let’s take a look at the Nifty charts and as we did last time, let’s start off from the higher time frame and drill down to the lower ones. Off to the quarterly chart!

A look at the quarterly chart indicates that the Nifty is in a firm uptrend and there is little cause of concern. After the Hammer pattern highlighted last quarter, it is positive to note the strong white candle during the quarter gone by.  The 14-period RSI is in the bull-market territory and has sufficient room to the upside before it gets stretched or overbought. The Bollinger Bandwidth has just turned from the lows suggesting that there is sufficient room to the upside before the bands gets too wide and a contraction sets in.

So, the key takeaway from the quarterly chart is that there is little cause of concern from a macro quarterly perspective for the Nifty. On this positive note, lets switch over to the monthly chart.

A few quick pointers from the above chart: Nifty last month managed to close above the middle Bollinger Band or the 20-month moving average, which is a bullish sign. The 14-period RSI (shown the top pane) has bounced off the bullish support level of 40. The Bollinger Bandwidth is not too stretched, suggesting there is scope for upside potential. Off to the weekly now.

In the weekly chart, the RSI has managed to close above 60 which is considered as upper threshold in a bear market. This corroborates with the positive undertone reflected in the higher time frames and hence a healthy sign. The Bollinger middle band or the 20-week moving average is sloping upwards and price is well above this band, which again is a positive signal. The MACD line (displayed in the bottom pane) is not only above zero but also above its signal line, suggesting bullish undertone. Let’s now take a quick look at the daily time frame.

The daily time frame too echoes a bullish undertone. The 14-day RSI has moved past the 60-mark and more importantly, it did not fall below the bull-mark support of 40 when the Brexit-crash happened. The MACD line is above zero and is on the verge of crossing over above its signal line.

It is imperative that the Nifty continues its upside march in the daily time frame to trigger a MACD buy signal. A sustained rally in the daily charts would also be helpful in translating into a MACD buy signal in the monthly time frame (not displayed in the chart). As of now there isn’t much of a difference between the MACD in the daily and Monthly time frames.

A failure here and a close below the swing low at 7,927 would be a cause of concern. This could open up downside extending upto 7,700-7,725. I would consider re-evaluating my bullish stance only on a breach of this support zone.

As far as the targets as concerned, I expect a rally to 8,750-8,800 in the short-term. The target is based off the Point & Figure chart using a box size of 0.5%. There are a few more bullish clues in Point & Figure chart but am not sharing the chart here as I sense the post is way too lengthy as it is.  Those interested in the chart may drop a mail to me or share their mail id in the comments section below.

With the completion of the week, month and quarter, I thought it would not be out of context to talk about nesting of time-frames. If you recall, I mentioned in a post few weeks ago that there is a case for a sharp rally as the Nifty is oversold across all time-frames. When time-frames coincide, there is a case for a big move. Most traders get slaughtered when they don’t realise this concept of nesting and interplay of time frames. Let’s start off our discussion with Bollinger Bands and here is the quarterly chart of Nifty.

Notice how price tagged the upper band and then corrected to the mean or the 20-period average. The bullish hammer near the middle band or the 20-period average is a positive signal. Trend therefore remains bullish until we fall below previous quarter low of 6,825. Let’s now turn our attention to the monthly chart.

Price in the monthly chart bounced off the lower Bollinger Band and it would not be illogical to expect a rally to the middle band or the 20-month average at 8132-ish. This level can be a ball-park target for the current up move. Let’s see if lower time frames such as Weekly and Daily are supportive of this bullish view. Over to the weekly chart !

The weekly chart sort of reinforces the bullish view. The breakout and successful retest of the middle band or the 20-week average is a bullish sign. Candlestick watchers would have already noticed the bullish Hammer at the middle band.  The next resistance is at the upper band, currently at 8,110-ish.

We now have the weekly and monthly time frames supportive of bullish view, indicating probable targets of 8,110-8,132. Over to the daily time frame.

What is of interest is the way price has bunched up in the upper half of the band, which is a positive sign. The Bollinger Band width too is narrowing, suggesting a sharp move soon. Given the positive undertone in higher time frame, I would expect a breakout to the upside.

The purpose behind this post is to demonstrate how different time frames nest into each other. Big and sharp moves happen when more than two time frames are in sync. Always be mindful of the higher time frame to avoid unexpected shocks.

For those interested in the Nifty view, I still feel 7,950-8,000 is doable. As highlighted in this post, Bollinger Bands suggest a slightly higher target of 8,110-8,132.