We've been providing some focus this morning on the Biotech Index and it is beginning to attract our attention even more after further study. Yesterday we wrote about "challenging your stocks" and we're going to do that now with the BTK.X. We would also alert traders that this index is currently trading right at its 200-day MA and this is a critical level! Here's a look at what we've done.
Biotechnology Index Chart - 60-minute interval.
We've added a new level of resistance to our 60-minute chart that coincides with the recent levels found in the BTK.X. Traders that have yet to initiate a bullish position in this index should monitor current levels closely. Traders that did enter bullish positions late yesterday or at today's open are looking good and we'd snug up stops to break even. The more we've studied this time interval and the daily interval chart, the more this index looks like it is currently trading right at a key level of resistance. A break above 640 is very bullish short-term, but right now we are very alert to potential resistance.
NASDAQ Composite Index Chart - 60-minute interval.
The NASDAQ Composite (COMPX) has been trading in positive and negative territory this morning but things are holding together. Good risk/reward for bulls with stops just below this morning's lows. Bullish target would be 3,000. Good to see the 50-period MA turning around and MACD firmly above the zero level. Stocks with stops close by should make for favorable bullish trades. We will also note that our alert on CSCO recently was triggered at $53 and this gives us hint that the NASDAQ may have some upside here.
Bullish Percent Updates
The following are Tuesday's "bullish percent" readings. This is our fourth attempt to put in front of traders a new perspective of looking at indexes and the markets. This information is not to be used by itself, but is a tool we feel can give traders an institutional perspective on assessing risk and general strength/weakness in the market and specific sectors we trade everyday.
As of December 06, 2000 close of trading. Sectors at or below 50% (alphabetically sorted) Aerospace/Airlines (40%) - Bull Alert Auto & Parts (34%) - Bull Alert Building (41%) - Bull Confirmed Business Products (31%) - Bull Alert Drugs (40%) - Bear Confirmed Electronics (34%) - Bear Confirmed Finance (41%) - Bear Confirmed Forest/Paper Prds (40%) - Bull Confirmed Gaming (34%) - Bear Confirmed Healthcare (35%) - Bear Confirmed Household Goods (32%) - Bear Confirmed Machinery and Tools (38%) - Bull Alert NYSE (43%) - Bull Confirmed Real Estate (46%) - Bull Correction Restaurants (38%) - Bear Correction Retailing (36%) - Bear Correction Transport/Non Air (46%) - Bull Confirmed Wall Street (46%) - Bear Correction Waste Management (36%) - Bull Alert Sectors at or below 30% (alphabetically sorted) Asia/Pacific (30%) - Bull Alert Biomedics/Genetics (29%) - Bull Alert Computers (25%) - Bear Confirmed Europe (26%) - Bull Alert Internet (15%) - Bear Confirmed Latin America (27%) - Bear Confirmed Leisure (30%) - Bear Confirmed Media (28%) - Bear Confirmed Metals Non Ferrous (28%) - Bull Alert Oil Service (28%) - Bear Confirmed Precious Metals (09%) - Bear Confirmed Protection Safety (22%) - Bear Confirmed Semiconductors (25%) - Bull Alert Software (26%) - Bull Alert Steel/Iron (28%) - Bear Confirmed Telephone (22%) - Bear Confirmed Sectors at or above 50% (alphabetically sorted) Banks (51%) - Bull Confirmed Chemicals (52%) - Bull Confirmed Food Beverages/Soap (51%) - Bull Alert Insurance (61%) - Bear Correction Oil (50%) - Bear Confirmed Savings & Loans (52%) - Bull Confirmed S&P 500 (58%) - Bear Correction Textiles/Apparel (53%) - Bull Confirmed Utilities/Electri (68%) - Bear Alert Sectors at or above 70% (alphabetically sorted) Utilities/Gas (70%) - Bull Confirmed Overview Traders can compare Tuesday's "Bullish Percent" to last week's "Bullish Percent" in order to get a feel for what sectors are on the move. We had a number of sectors that reversed higher and lower, but to save time and space we'll list below the key sectors that might provide a spark for a further broad-based market rally. Eight sectors reversed higher; they are Biomedics/Genetics rose from 24% to 29%, Building rose from 34% to 41%, Chemicals rose from 44% to 52%, Insurance rose from 54% to 61%, Internet rose from 10% to 15%, Semiconductors rose from 16% to 25%, Software rose from 20% to 26%, and Wall Street rose from 36% to 46%. Most notable among the sectors reversing lower are; NYSE which slipped from 48% to 43%, S&P 500 slid from 58% to 52%, Drugs tumbled from 44% to 40%, and Restaurants dropped from 46% to 38%. We're seeing a lot of sectors shift to the "Oversold" part of our gird, so traders should be snugging down stops on short positions. Listed below are last weeks "Bullish Percent" which traders can use as a way to access risk levels from week to week. As of November 28, 2000 close of trading. Sectors at or below 50% (alphabetically sorted) Aerospace/Airlines (44%) - Bull Alert Asia/Pacific (32%) - Bull Alert Auto & Parts (34%) - Bull Alert Building (34%) - Bull Correction Business Products (34%) - Bull Alert Chemicals (44%) - Bull Confirmed Drugs (44%) - Bear Confirmed Finance (40%) - Bear Confirmed Forest/Paper Prds (44%) - Bull Confirmed Gaming (40%) - Bear Confirmed Healthcare (36%) - Bear Confirmed Household Goods (34%) - Bear Confirmed Leisure (34%) - Bear Confirmed Machinery and Tools (40%) - Bull Alert NYSE (48%) - Bull Confirmed Oil Service (32%) - Bear Confirmed Real Estate (46%) - Bull Correction Restaurants (46%) - Bear Correction Retailing (42%) - Bear Correction Transport/Non Air (48%) - Bull Confirmed Wall Street (36%) - Bear Confirmed Waste Management (36%) - Bull Alert Sectors at or below 30% (alphabetically sorted) Biomedics/Genetics (24%) - Bull Alert Computers (24%) - Bear Confirmed Electronics (30%) - Bear Confirmed Europe (20%) - Bear Confirmed Internet (10%) - Bear Confirmed Latin America (28%) - Bear Confirmed Media (26%) - Bear Confirmed Metals Non Ferrous (30%) - Bull Alert Precious Metals (32%) - Bear Confirmed Protection Safety (26%) - Bear Confirmed Semiconductors (16%) - Bear Confirmed Software (20%) - Bear Confirmed Steel/Iron (24%) - Bear Confirmed Telephone (18%) - Bear Confirmed Sectors at or above 50% (alphabetically sorted) Banks (52%) - Bull Confirmed Food Beverages/Soap (54%) - Bull Alert Insurance (54%) - Bear Confirmed Savings & Loans (54%) - Bull Confirmed S&P 500 (52%) - Bear Confirmed Textiles/Apparel (56%) - Bull Confirmed Utilities/Electri (68%) - Bear Alert Sectors at or above 70% (alphabetically sorted) Utilities/Gas (70%) - Bull ConfirmedOverview
Three sectors reversed higher; they are Biomedics/Genetics which rose from 18% to 24%, Transport/Non Air rose from 46% to 48%, and the Utilities/Gas rose from 68% to 70%. Sixteen sectors saw their "Bullish Percent" fall. The Computers sector fell from 30% to 24%, Electronics fell from 32% to 30%, Finance fell from 46% to 40%, Gaming fell from 44% to 40%, Household Goods fell from 36% to 34%, Insurance fell from 62% to 54%, Internet fell from 16% to 10%, Leisure fell from 40% to 34%, Media fell from 30% to 26%, S&P 500 fell from 60% to 52%, Protection Safety fell from 28% to 26%, Semiconductors fell from 28% to 16%, Software fell from 26% to 20%, Steel/Iron fell from 28% to 24%, Telephone fell from 24% to 18%, and Wall Street fell from 52% to 36%. We would like to point out a lot of sectors continue to shift to the "Oversold" part of our grid.
Understanding risk is key
Ask any football coach what he perceives to be most important variable to winning a game and he will say "maintaining favorable field position." In order to avoid severe losses, and understand risk, traders need to know where they stand on the field before placing trades. They also need to understand the principles of risk in order to optimize their rewards. Of the many market indicators traders have at their disposal, we like the "Bullish Percent" as a way to determine our "field position."
The Bullish Percent is a quantitative indicator that helps guide us and gives traders and investors an idea as to the kinds of "play calls" they need to be looking for. In a football game there is a time to be playing offense and a time to be playing defense. Depending on who's on the field, "play calls" vary depending on what goal line you're closest too.
Calculating the bullish percent?
When calculating the Bullish Percent you divide the number of stocks trading on a Supply/demand buy signals (buy signals are bullish) by the total number of stocks listed in the sector or index. The highest level achievable is 100%, and the lowest level is 0%. If we are monitoring a 500 stock index, and 200 of the stocks have recently
generated a "buy signal", we can quickly calculate a 40% bullish reading (200/500 = 40%). We would argue that an index that is trading near 100% is inherently more "risky" than a sector trading near 0% for a bullish trader. The opposite would be true for a bearish trader.
The Playing field
We think the best seats at a football game are near the 50- yard line, and that's where we will be sitting when looking at the playing field. The left endzone is titled "Oversold", mid-field "Normal", and the right endzone is titled "Overbought". The terms "Oversold" and "Overbought" are quantitative and not arbitrary terms like we hear in the media. The important parts (field position) of the grid (football field) start near 30% and 70%. Touchdowns are not necessarily scored in the end zones, but once the team (index/sector) reaches the 30% and the 70% levels, they score. Levels above the 70% are generally considered overbought and levels below 30% are considered oversold. Next time an analyst makes an "overbought" or "oversold" call on a sector, check the bullish percent just to make sure.
The best "bull alert" signals come when the Bullish Percent goes below 30% and then reverses up (must reverse 6%) into a column of X's (demand). The best profit taking signals come when the indicator moves above 70% and then reverses below 70% into a column of O's (supply) There are six signals, or degrees of risk associated with this indicator:
Bull Alert: Characterized by the Bullish Percent falling to 30% or below and then reversing up into a column of X's. The traffic light turns green. Looking for stocks that are breaking downward trending, or horizontal resistance.
Bull Confirmed: The strongest of market conditions. Characterized by a column of X's exceeding a previous column of X's. The traffic light is green. Looking for stocks that are breaking out of bases, or stocks that have pulled back to support after breaking a trend of resistance.
Bull Correction: The bull market is taking a breather though it should resume shortly. The traffic light is yellow. Looking for stocks that have pulled back to a level of support or breaking out of consolidation.
Bear Alert: Characterized by a Bullish Percent falling from above 70% to below. Profits should be taken or positions hedged. The traffic light turned red. Looking to short stocks that have underperform the recent "sector bull market", or stocks that previously broke a big level of support on volume, then rallied on weak volume.
Bear Confirmed: The weakest of markets conditions. Characterized by a column of O's exceeding a previous column of O's. Traffic light is red. Shorting breakdowns or rallies to resistance, with stops close by.
Bear Correction: The bear market is taking a breather. Trading rallies could be seen, but the bear market will likely resume. The traffic light is flashing red... look both ways carefully before crossing the intersection. Looking both ways is key. Most of the damage is done, but there may still be some casualties. Be quick to cover shorts that move against you, as they may be leaders in a new secular bull market. Remember, when evaluating any particular signal (or risk level); be sure to take into consideration the field position.
Sector Bullish Percents
Using this concept, traders should monitor bullish percent levels for the groups in which they trade. The percent of stocks on buy signals in each sector is plotted on a grid from 0% to 100%. Again, the best "bullish alerts" come when a sector reveres into a column of X's from below 30% and the best "bear alerts" come when a sector reveres into O's from above 70%. The same six signals, or risk levels apply.
SUPPLY/DEMAND CHART FOR "XYZ" STOCK
What generates a "buy signal" in a stock? When a column of X's (demand) exceeds a previous column of X's, a "buy signal" is generated. Examples of "buy signals" are noted above, circled in green. What generates a "sell signal"? When a column of O's (supply) exceeds a previous column of O's. The five sell signals were noted when a column of O's exceeded a previous column of O's (red O's).
Understanding everything on a chart
Now that we explained X's and O's on a specific stock and its supply/demand chart, we'll take a minute to explain how "time" and "trend" are accounted for. Reference to time; the numbers (5,6,7,8,9) found on our chart refers to the beginning of each month that a particular price level was achieved. For example the first X or O in May would be replaced with a "5", June is marked "6" etc. The months October through December are noted A, B, and C, respectively. Traders should note the "*". These are used to represent changes in trend. Until this "trend line" is broken, its progression should be monitored and understood.
Bullish Percent for the Sector - 2% scale.
Trade like an Institution
The above chart is a "bullish percent" chart. It is NOT a chart of a stock. It is a quantitative measure of supply/demand "buy signals" that has been charted on a 2% scale. During August, XYZ (the STOCK) was in a column of X's and gave a "buy signal" at the 118 level, while the SECTOR that XYZ is a component of(immediately above) was in a column of O's. This told us XYZ was a leading stock in a sector that was in a "bull correction" phase. When September (blue 9) arrived XYZ's fortunes changed and reverted back into a column of O's (a sign of weakening) and the Computer Sector had reversed into a column of X's (a sign ofstrengthening). If we correctly identified XYZ as a "leading indicator" what would we perhaps expect from the group?
Institutional market makers are constantly assessing risk at their trading desks. Traders that want to think like an institution view the equity markets purely on a risk/reward basis and the bullish percent is a great tool to understand this risk. As traders, we must realize that a market maker has to provide liquidity regardless of market direction. If you put yourself in their shoes, you'll probably see that a market makers biggest challenge is managing risk/reward solely on a supply/demand relationship. If we as traders (craftsperson) can use this tool along with our bar charts, MACD, etc. we can get a better feel of what institutional traders, or institutions may be doing. If we're monitoring "big money" and doing what they're doing (markedly different than what they may be saying) we stand better odds of profiting.
Print this out!
Print this information out and keep it accessible. We will be using the bullish percent in future discussions and intra-day updates.