The above chart tells us that the SPX is just as risky as it was back in early September, but it also speaks of strength. It wouldn't be impossible for this index to reach a level of 62% if the NASDAQ starts firming up. One can imagine the NASDAQ reversing up from its current level, thus pushing the SPX higher. That would set the stage for a potential "overbought" reading in the SPX bullish percent near 70%. This is just one scenario that traders should be preparing for.
Bullish Percent for Over-the-counter - 2% scale.
Last week, the bullish percent for the NASDAQ reversed from the 50% level down to 40%, but this past week's activity showed less damage done internally. With the activity we're seeing in the bar charts versus the above chart, it tells us that we should be trading for profits. It also tells us that breaking in trends can be providing powerful moves in either direction.
Bullish Percent for NYSE - 2% scale.
Purely from perspective of risk, one, two and three lettered stocks that trade on the NYSE look more attractive as indicated by the chart above. Notice the series of higher highs and higher lows since the beginning of the year. This differs markedly from the S&P 500 and over-the-counter markets and trading looks to be more stable. This may give traders some insight as to how the market maker in the NASDAQ can affect trading levels with their bids and offers. Bullish traders that are new to trading may want to start with 3-lettered stocks as they are somewhat less volatile than their 4-lettered friends and appear to be gaining favor in the current market environment.
Our interpretation of the above three indexes would be as follows. Stocks in the NYSE are probably good candidates to be buying on pullbacks near support and those that are breaking out of prolonged bases. Stocks in the S&P 500 are probably seeing some heavy offers by market makers, where they can control their inventories and turn into buyers if those resistance levels are violated to the upside by a significant amount. We'd also expect that institutions are doing most of their buying near longer-term support levels. In the broader NASDAQ, we'd expect some major short positions are calmly being bought on the bid in bits and pieces and selling is being experienced when stocks get extended to the upside. With this in mind, we'd again point out that this is a traders market. Investors have seen 10-15% gains slowly erode and then revert to losses with some of the recent moves. Currently, none of the three indexes above are considered "oversold" or "overbought" so take what you hear or read in the media with a grain of salt. We wouldn't disagree with the statement that the NASDAQ is more oversold than the S&P 500 and we can point to the above charts to help make our case.