Market Breadth
figure 22.14 Percentage of Stocks above the 50‐Day Moving Average Signaling Po-
tential Buy Signals in the S&P 500 Index.
Courtesy of Stockcharts.comOne particularly effective buy signal is the 3 to 5 percent upside reversal for
reversals near or below the 30 percent oversold level. See Figure 22.14. Once a
buy signal is identified, look for price confirmation on the S&P 500 near month
futures or SPY ETF.Bullish percent index
The Bullish Percent Index tracks the number stocks in a group or index that are on
Point‐and‐Figure buy signals, which is represented by a Point‐and‐Figure Double
Top upside breakout. When the percentage of stocks on a buy signal is near or
breaks above the 80 percent level, it is considered overbought and a potential cor-
rection or reversal in expected, which is to be confirmed by price. Figure 22.15
depicts the tendency for the market to reverse every time it tests the overbought
level. Conversely, when the bullish percent index is near or below its 30 percent
oversold level, as it was around the end of 2011, a trader is afforded a very ad-
vantageous long entry.the volatility index
Volatility indexes are also particularly effective in gauging the general broad mar-
ket sentiment. Figure 22.16 shows how the Russell 2000 Volatility Index tracks
the amount of fear in declining markets. We can see that tops in the volatility in-
dexes correspond very closely to bottoms in the markets. We may use historically
extreme levels to time future market bottoms.