One of our key indicators for monitoring shorter-term market risk (NASDQ-100 Bullish Percent) is at the 11% level and matches similar levels seen in late March and early April. This indicator gives hint that the bulk of the risk in this portion of the market has been removed from this group of stocks. This data is more important to the bearish trader that it is for the early equity bull at this point, as an equity bull would want to see a reversal higher before beginning to dip his/her toe in the waters from the long/call side of things.
While the bullish percent can read 0% for stocks having a "buy signal" on its point/figure chart, the trader should understand that this indicator is at a near-term historic low and should be lowering stops on bearish trades for stocks in the NASDAQ-100 ($NDX.X)
NASDAQ-100 Bullish % Chart - 2% scale
Current reading for the NASDAQ-100 from www.stockcharts.com is at 11% and marks similar quantitatively oversold levels found in late March and early April. The bullish percent is best used as an indicator of risk. Right now, new bearish trades that are initiated have greater risk of moving against the trader. Bullish traders should wait for some type of reversal higher to the 18% level before initiating any type of bullish trade. At that point, I would only be looking to trade bullish short-term, using the bullish percent action back in March and April (red 3 and red 4 range) as a guide.
Understanding market risk probably the most important element for traders to get a grasp of and the bullish percent charts do a great job in displaying a quantitative approach to "oversold" and "overbought." The bullish percent for the S&P 500 ($BPSPX) is currently at 37% and it too is at levels found in early April before its torrid rise to 74% bullish by early May. Bearish traders need to be lowering stops and limit new short positions to 1/2 at this point. Avoid shorting stocks that appear extended to the downside, but monitor them for potential shorts/puts should they rally to a good level of technical resistance.