The Bullish Percent Index (BPI) is a breadth and Overbought/Oversold technical indicator. It is based on the point-and-figure technical discipline. It charts the percentage of stocks on Point and Figure Buy Signals. One of the most interesting parts of this technical indicator is that there is no ambiguity on P&F charts because a stock is either on a P&F Buy Signal or P&F Sell Signal. As with most oscillators, the BPI fluctuates between 0% and 100%. Below 30% of stocks that are at buy signals, the BPI shows that the market is oversold and may be ready for a technical turnaround. On the other hand, when more than 70% of the stocks that are at buy signals, this suggests an overbought condition and hence vulnerable for a pullback.
Investors and traders often use the Bullish Percent Index (BPI) a dual technical indicator - to gauge the breadth of the market (market internals) and to identify overbought and oversold conditions. The original indicator was developed to track the NYSE Composite Index (NYA), but can also be applied to the S&P 500, the NASDAQ Composite, and even narrowed based indexes such as the Dow Jones Industrial Average (INDU) and the Nasdaq 100 Index (NDX).
Remember, market indexes can remain in overbought or oversold levels for extended periods. So, the BPI readings below 30 percent or above 70 percent do not necessarily signal a buy or sell signal. However, BPI is a simple way to quantify the overall state of the market with a single chart. For contrarian investors, look for BPI falling below 30% and then reversing back above this oversold threshold to buy. For sellers, look for bearish reversals above the 70% overbought level. For trend followers, look for bullish reversals occurring above the 50% level.
Although BPI is not a leading indicator, it gives you another technical indicator to help evaluate the overall health of the market. It is important to recognize the BPI indicator does not generate many buys and sells in major market indexes. But when the reversal signal does occur it is important to heed the buy or sell indication.
Attached below are the BPI indicator applied to key major market indexes including the SPX Index, INDU, NYA, COMPQ, and NDX. Note the recent Sep 2020 correction may have been sharp. However, the setback is not yet trading at the oversold level (below 30%). This would imply the explosive Mar-Sep 2020 rally has created an overbought condition, and to alleviate this condition it would imply either more time or a deeper setback.