Yesterday's market action finally took its toll on the S&P 100 bullish percent chart ($BPSPX) and has this index now in "bear confirmed" status. This is a progression we usually find as the market internals begin to deteriorate. Traders that will look back at the most recent "bear confirmed" point in February of this year begin to understand potential downside risk that presents itself near-term and how a defensive posture should be taken for trading.
S&P 100 Bullish Percent Chart - 2% scale
Yesterday's charting of the S&P 100 bullish percent ($BPOEX) from www.stockcharts.com shows a "bear confirmed" status. The "bear confirmed" reading comes from a progression of the different cycles this chart has given. For example, in late March this index went into "bull alert" status from the reversal up into X's at 28% (just prior to the red 4). Once the index achieve the 30% level (red 4 is first entry in April), the bullish percent was off to the races as the internals improved markedly and stock after stock began giving buy signals. As you follow the X's higher, this sector went "bull confirmed" as the column of X's exceeded a previous column of X's at 52%. In May (red 5) this indicator achieved the 70% level (considered overbought) and reversed lower into "bear alert" status. Then in late July and early August (red 8) the indicator reverse higher back into "bull confirmed" status. Not long ago, the indicator reversed back lower into "bear alert" and yesterday lower O column below the previous O column has us at "bear alert" status. Hopefully you get the feel of how this indicator flows much like a roller coaster as it relates to the internal strengthening and weakening of a sector. I would currently expect this indicator to potentially test the 30% level and would set up potential trading strategies for such an event.
We can perhaps now use the above data to better understand how the OEX.X trades over the next couple of weeks. The point we would concentrate on are points of similar activity of "bear confirmed" status dating back to late February and early March. A good trader expects similarity, but also looks for stocks that are diverging! That's where the best opportunities exist.
S&P 100 Index Chart - last eleven months
By correlating past bullish percent reading to a bar chart, perhaps we set the trading scenario for some downside action and a bit of consolidation between 560 and 580, then potentially followed by a dramatic drop to oversold levels on the bullish percent chart of 30%. That type of drop in bullish percent could see the OEX.X at the 550 level. This gives hint that there are still some good potential short/put candidates and that bullish traders need to be VERY selective in their buying. Relative strength become of UTMOST importance!
The best short/put candidates are stocks with poor relative strength that rally to a level of resistance. The best bullish candidates are those that show good relative strength and pull back to support. We've taught how to use all of these tools and you can get free charts that use the relative strength tool at www.stockcharts.com.