Bullish Percent Index: Meaning, Interpretation, Trading Strategies and More

Bullish Percent Index Meaning Interpretation Trading Strategies and More

In this article, we will discuss

Indices give you a fair idea of a particular sector, industry or the market at large. In the Indian financial markets, we have a vast range of broad market, sectoral and thematic indices that help you gauge different segments of the market at a glance. However, how do you know if an index is performing well overall?

The answer to this question lies in select indicators that help evaluate the strength, direction, sentiment or health of an index. One such indicator commonly used for this purpose is the Bullish Percent Index (BPI). In this article, we take a closer look at the BPI indicator, how it is calculated and interpreted and why its use case matters.

What is the Bullish Percent Index (BPI)?

The Bullish Percent Index is a simple market breadth indicator that tells you how bullish (or healthy) an index is. In simple terms, it is the percentage of stocks or components of an index that are bullish. This value gives you clarity about the dominant investor sentiment regarding the stocks or securities concerned.

A high BPI indicates that most stocks in the index are bullish, while a low BPI suggests that bearish sentiment is dominant within the index. Since the BPI is primarily tied to indices, which are broad market statistical tools, it is considered a market breadth indicator. Unlike many other indicators such as moving averages, RSI, MACD etc, which can be applied to individual stocks and securities, the Bullish Percent Index is only valid when applied to an index (or any group of securities).

Using Point and Figure Charts to Evaluate the BPI

Point and Figure (P&F) charts are commonly used to identify the bullish stocks within an index. To understand the role of P&F indicators in computing this index health indicator, let us first decode how Point and Figure charts work.

  • Xs and Os

They primarily use ‘X’ marks to represent rising prices and ‘O’ marks to represent falling prices. Each X or O represents a specific degree of price movement, called the box size, which is predetermined by the trader.

  • Columns

These price movements are then plotted in columns, with each column representing a specific price range. When prices rise by at least the box size, an X is added to the column. When prices fall by at least the box size, an O is added instead. A new column begins when a price reversal occurs — which is when the price moves by a certain predetermined amount in the opposite direction. This amount is known as the reversal size.

Buy Signals and Sell Signals in P&F Charts

P&F charts can display various patterns and signals like double tops, double bottoms and trend reversals. However, for the purpose of BPI calculation, you need to only look for two kinds of signals, as outlined below:

  • P&F Buy Signal

A buy signal in these charts is generated when one column of Xs exceeds (i.e. becomes higher than) the previous column of Xs. This means the stock concerned is bullish.

  • P&F Sell Signal

A sell signal in Point and Figure charts is generated when one column of Os exceeds (i.e. becomes lower than) the previous column of Xs. This means the stock concerned is bearish. 

Calculating the BPI Indicator

Now that you know how to identify buy signals and sell signals in P&F charts, let us examine how you can use these signals to calculate the Bullish Percent Index. Here are the steps involved.

  • Select the Index or Group of Stocks

Start by selecting the index (or any other group of stocks or securities) whose internal health you wish to assess.

  • Identify Bullish Signals

Review each stock in the selected group and determine if it is currently giving a buy signal on the P&F chart. This is generally represented by a break above a previous high column of Xs (if using a 3-box reversal method). Count the number of stocks in the group that are giving buy signals.

  • Calculate the BPI

Once you have the above information, all you need to do is calculate the BPI indicator using the formula shown below. 

Bullish Percent Index = (Number of Bullish Stocks ÷ Total Number of Stocks) x 100

This will give you the bullish component of the index as a percentage. You can then interpret the results and make trading or investment decisions accordingly.

BPI Calculation: An Example

Let us discuss an example to better understand how this indicator is calculated. Say you are looking at an index with 500 stocks. Of these, 374 stocks show buy signals on the P&F chart. Using the formula from above, here is what we have.

Bullish Percent Index:

= (Number of Bullish Stocks ÷ Total Number of Stocks) x 100

= (374 ÷ 500) x 100

= 74.8%

This means that the Bullish Percent Index for this group of stocks is 74.8%, indicating that 74.8% of the stocks in the index are currently showing buy signals on the P&F chart.

Interpreting the BPI

The BPI indicator can range from 0% to 100%. Broadly, values over 50% indicate that the index is mostly bullish, while values below this mark mean the index is bearish. Generally, for smaller indices like the Sensex (which has only 30 stocks) or the Nifty 50 (which has 50 stocks), the BPI value may possibly reach these extreme values.

For instance, the BPI indicator will be 100% if all the 30 stocks in the Sensex are bullish (and conversely, 0% if they are all bearish). However, in larger indices that are made up of hundreds or thousands of stocks, the possibility of the BPI indicator reaching these extreme ends is extremely low.

The BPI can also help you identify overbought and oversold conditions. Here’s how:

  • BPI > 70%

If the value is 70% or higher, it signals an overbought condition where the vast majority of the stocks in the index are bullish. This may potentially be a sign that a bearish reversal could follow soon.

  • BPI < 30%

BPI values below this level are tied to an oversold condition as most of the stocks in the index or group are bearish. It could be a sign to keep an eye out for a possible bullish reversal in the next few trading sessions.

Reasons to Assess the Health of an Index

While the BPI is a fairly easy indicator to calculate and interpret, you may be wondering why it matters for traders and investors. Here are the top reasons to use the BPI to assess the health of an index or a group of stocks.

  • Market Sentiment Insights

The health of an index can give you insights into market sentiment. A strong and healthy index suggests predominantly bullish sentiment because investors are optimistic about the market. Conversely, a weak index may indicate bearish sentiment and a lack of confidence in the market.

  • Economic Indicators

Index health can also serve as an economic indicator. A rising index may suggest a growing economy, as investors are optimistic about future earnings and economic growth. A declining index, on the other hand, may indicate economic uncertainty or contraction.

  • Portfolio Management

Knowing the health of an index is also useful for portfolio management. If an index is strong and expected to continue rising, you may want to allocate more funds to stocks in that index. Conversely, if an index is weak, you may consider reallocating your investments to safer assets.

  • Risk Management

Understanding the health of an index is crucial for risk management too. A weak index may indicate increased market volatility and risk, prompting the need to adjust your risk exposure accordingly.

  • Trading Decisions

You can also use index health to make trading decisions. A strong index may call for adopting bullish trading strategies such as buying stocks or call options. A weak index, on the other hand, could be a sign to use bearish strategies like selling stocks short or buying put options.

  • Index Fund Investments

The health of an index is an important consideration if you are selecting index funds for your portfolio. This is because it gives you a better idea about the fund’s performance and risk. You need to assess the health and stability of an index before investing in a fund tracking that index.

Conclusion

The bottom line is that the Bullish Percent Index is a reliable tool for traders and investors who want to understand market dynamics beyond conventional indicators. Its unique approach of relying on Point and Figure charts provides a clear and straightforward measure of market sentiment. Furthermore, it gives you a better idea of the underlying strength or weakness within the market — which is a perspective that is particularly valuable during periods of market uncertainty.

Including the BPI in your trading strategy means you get to understand the broader market context and recognise shifts in investor behaviour more easily. By integrating BPI analysis with other technical and fundamental tools, you can identify potential investment opportunities and also improve risk management by accounting for overbought or oversold conditions.

As with any indicator, however, the key here lies in combining the insights from multiple sources (like BPI and other metrics) to support your trading and investment decisions. By doing so, you can navigate the complexities of the market with greater confidence and precision.

Disclaimer: INVESTMENT IN SECURITIES MARKET ARE SUBJECT TO MARKET RISKS, READ ALL THE RELATED DOCUMENTS CAREFULLY BEFORE INVESTING. The asset classes and securities quoted in the film are exemplary and are not recommendatory. SAMCO Securities Limited (Formerly known as Samruddhi Stock Brokers Limited): BSE: 935 | NSE: 12135 | MSEI- 31600 | SEBI Reg. No.: INZ000002535 | AMFI Reg. No. 120121 | Depository Participant: CDSL: IN-DP-CDSL-443-2008 CIN No.: U67120MH2004PLC146183 | SAMCO Commodities Limited (Formerly known as Samruddhi Tradecom India Limited) | MCX- 55190 | SEBI Reg. No.: INZ000013932 Registered Address: Samco Securities Limited, 1004 - A, 10th Floor, Naman Midtown - A Wing, Senapati Bapat Marg, Prabhadevi, Mumbai - 400 013, Maharashtra, India. For any complaints Email - grievances@samco.in Research Analysts -SEBI Reg.No.-INHO0O0005847

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