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NYSE Bullish % reverses into "bull correction"

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We don't mention the NYSE Bullish Percent ($BPNYA) indicator all that much in our commentary as this indicator of "risk" and bullishness or bearishness in the market is a relatively slow mover when compared to the often mentioned NASDAQ-100 Bullish % ($BPNDX) and S&P 500 Bullish % ($BPSPX), but yesterday's market action has the $BPNYA reversing into a column of O's and that has all of our major bullish % charts in a defensive posture where supply now has the upper hand.

NYSE Bullish % Chart - 2% box

Wow! Over 8.5 years of bullish % data can be viewed on the NYSE Bullish % ($BPNYA) from www.stockcharts.com. This tells us that this broader market indicator is a slow mover. While it is a "slow mover" yesterday's reversal is another negative that shows market internals on the more institutionally held NYSE Composite (NYA.X) 555.90 -0.71%. The NYSE Composite is what many call "the true market" as the stocks listed there as opposed to the NASDAQ Composite (COMPX) 1,568 -1.64% are less influenced by some of the gyrations that market makers can have on stock price action.

For now, yesterday's reversal in the NYSE Bullish % ($BPNYA) become a 1,000 lb gorilla that will almost act like a pillow that smothers near-term rallies.

Traders will now note, that a comparison of the quicker moving NASDAQ-100 Bullish % ($BPNDX), which currently reads 27% bullish is at "opposite ends" of bullishness. This is an important observation to understand when it comes to BEARISH trading.

Equity BEARS should now start turning their attention to 1,2 and 3-lettered stocks that are breaking below upward trends and generating sell signals, or looking to short 1,2 and 3-lettered stocks that trade below trend and have perhaps rallied to levels of resistance. In essence, these types of stocks should provide better risk/reward trading near-term as it relates to the bullish %.

I need to stress! Below trend and generating sell signals. Too often, a trader will simply think they can find success in a bearish trade "just because" the bullish % reverses lower. Yet often times, a stock in an upward trend that is still on a buy signal buck the broader market decline and outperforms to the upside or performs relatively better than other trades that could have been taken.

Classic example might be IGT

On two separate occasions, I've profiled International Game Technology (NYSE:IGT) $60.90 -0.14% as bearish for 1/2 positions based on the thought that this stock will roll over after a nice cyclical run that has lasted over 2-years. I've traded/invested in this stock over that time span and this stock was actually a larger holding of clients that were longer-term investors when I was a broker back in late 1999. In March, the long column of O's from $69-$57 hinted that the stock may have found a "top."

However, a trader/investor that has placed all their bearish money on this trade and longer-term profile of the Jan $60 or Jan $55 puts has found little success. Part of the "reason" may well be that the stock is still in upward trend.

Lessons. Try to not trade short-term option expiration in stocks that are in upward trend. If you believe the stock is lower longer-term based on technical observations, then make your bets longer-term, but start out with 1/2 positions. Then, once a longer-term trend is broken, begin measuring bearish vertical counts against the break in trend to see if you should then round to full position, or simply stick with the 1/2 position.

While I'm on the topic of IGT. We have seen some "casino" stocks warn on earnings in recent weeks. While this may viewed as a potentially "bearish" fundamental prospect for the worlds largest maker of slot machines, it has yet to really show in the technicals.

Time will tell, but we can perhaps see how a 3-lettered stock in an upward trend as actually held up rather well.

Disclosure: I currently hold a bearish position in IGT and will "confess my sins" with a trade above the $65.05 level.

Stocks listed on the NYSE I've profiled as bearish in recent weeks are Boeing (NYSE:BA), Verizon (NYSE:VZ) and Citigroup (NYSE:C).

Jeff Bailey
Senior Market Technician
Option Investor

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