How To Use S&P 500 Bullish Percent Index?

Investors constantly search for ways to measure stock performance and forecast future trends. While fundamental analysis digs into a company’s financials to try to predict future performance, technical analysis charts and tracks the movement of a stock’s price to understand where the stock will go next.

Bullish Percent Index (BPI) is a tool that’s been used by technical analysts since the 1950s, and it’s a simple and straightforward chart. Its main goal is to identify when a stock’s price is about to increase or decrease. For example, if a good stock has been dropping, an analyst might use BPI to measure when the bottom has been hit and the stock is starting on an uptrend.

But BPI can also be used to measure groups of stocks, or indexes. Because the S&P 500 is such a critical benchmark for the market, it’s natural that investors would use an S&P 500 BPI as a tool to measure when a bear market has hit bottom and is about to turn bullish, or when a bull market is headed for a downturn.

But how do you use an S&P 500 Bullish Percent Index?

What is an S&P 500 Bullish Percent Index?

A Bullish Percent Index is a type of point-and-figure chart that breaks down a stock’s price movement. Most investors are familiar with simple bar charts that document price movements over a certain amount of time (day, past 6 months, year-to-date).

Candlestick charts are another tool that’s used to measure stock movement because they don’t just measure price changes, they’re a visual representation of how investor sentiment changes over the course of time.

Point-And-Figure charts break down those price movements into a series of columns of Xs and Os. The Xs represent increases in the stock price and the Os represent decreases. But a column of Xs on its own doesn’t mean that the stock is breaking out. Analysts are looking for patterns in the charts, like when a column of Xs exceeds the previous column of Xs.

Signals From an S&P 500 Bullish Percent Index

A predetermined amount of price movement creates a new box, and either an X or an O goes in based on the direction of the movement. Beyond just simple buy and sell signals, there are many other signals that analysts receive from point-and-figure charts.

Bull Alerts occur when a stock’s BPI is below 30% and a new pattern of Xs forms, possibly signaling the stock is about to increase. Bear Alerts are the opposite, when a stock’s BPI is above 70% and a new pattern of Os drops below the 70% line.

A Bull Confirmed signal happens when a stock is on Bull Alert and the pattern of Xs continues to dominate. A Bear Confirmed signal happens in the opposite scenario.

Because stock prices are volatile, analysts also look for Bull and Bear Corrections. A Bear Correction happens when a stock is on Bear Alert but then a rising pattern forms. A Bull Correction is when a stock is on Bull Alert but a recurring pattern of Os takes over.

Is an S&P 500 Bullish Percent Index Reliable?

BPI is a helpful tool in an investor’s toolbox, but analysts are divided on how actionable its data is. While some analysts swear by point-and-figure charts, many analysts will use BPI  just to confirm signals from other charts, and as a way to detect false breakouts.

One reason is that the box size of a chart is an arbitrary measure. A box is created when a certain amount of price movement happens, but that amount varies. A box can be created when the stock goes up $1, or when the stock goes up 10%. Either way, it’s important to understand the parameters of the index.

Another concern with Point-and Figure charts like the BPI is that it’s entirely reactive to price changes. Investors are looking to get ahead of price movements, and BPIs will always be a document of changes that have already happened. And even though the chart is often used to detect false breakouts, false breakouts still happen.

Why Use an S&P 500 Bullish Percent Index?

The S&P 500 is an index of the 500 largest companies in the US stock exchange. It is one of the most frequently tracked measures of the stock market’s performance. Because a Bullish Percent Index is meant to track a stock or group of stocks, it makes sense that analysts would look at an S&P 500 BPI for an indication of the market as a whole.

Credit: StockCharts.com

The main goal for investors is to buy assets when the stock market is down and make the most of inevitable upswings. Because the Bullish Percent Index can indicate when a stock or an index has hit bottom, it makes sense why analysts watch BPIs closely. Conversely, in bull markets, analysts will continue to look for indications that the market might be heading for a downturn.

What Does the S&P 500 Bullish Percent Index Indicate?

The S&P 500 has increased over 16% this year, rallying back from a tough year in 2022. Because of that rally, it’s essential to look for signals that the market may be due for a pullback.

The S&P 500 BPI supports just that scenario. The BPI has been above 70% but it’s begun to fall. After a Bear Alert, the downward trend continued below 70% into Bear Confirmed territory. That could mean the rally has hit the top and a sell-off is on the way.

While that’s not the news most investors want to hear, monitoring the market and using every available tool can help you protect your investments in the long run. That’s why technical analysts use the S&P 500 Bullish Percent Index.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.