Dorsey notes that market indices hide reality. Moves in a small number of stocks can drive the index higher. The bullish percent index assesses risk in the market, not performance.It's a compilation of the percentage of (net) stocks on NYSE (1,831 at 26.10.2010) showing their first point and figure buy signal. Calculated weekly, each box represents 2% and the vertical axis runs from 0% to 100%.
If there are 1,831 stocks in the index and say 920 on P&F buy signals, the bullish percent is 50%. It only records the FIRST buy signal, all subsequent buy signals are not counted.
If the index had 100 stocks and over the next week 12 stocks experience a new buy signal and 10 stocks experience a new sell signal, that net 2% increase would fill an X box in a rising column of X's. In other words a 2% net change allows the chart to rise by one box.
Using the same 3 box reversal technique as for normal P&F's to shift columns in the index takes a (3x2%) 6% net buy/sell signal to cause a reversal and vice versa. As a rule of thumb, areas above 70% and below 30% are the extremes. Above 70% is over bought and below 30% is over sold.
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