Using the BPI Indicator for Stock Trading provides good signals as to the state of the market. The bullish percentage indicator (BPI) compares the percentage of stocks that have generated buy signals compared with the total number of stocks in a given index.

You can check out the various BPI indexes here:-

http://stockcharts.com/symsearch/index.html?$BP

What it means:-

Bull alert: When the BPI is less than 30% and changes direction.

Bull confirmed: When the BPI forms a higher high.

Bear alert: When the BPI is above 70% and changes direction.

Bear confirmed: When the BPI forms a lower low.

Todd B

It is our aim as stock traders to trade with the dominant trend. We have looked at the business cycle and interest rates and how they can impact of the different phases of the market. We have also looked at business sector analysis to establish which industries tend to do well in the different market phases.

Now let’s look at some technical market indicators to help up confirm the dominant trend and more closely align it with stock market movements.

Have a look at our articles on Reading Stock Charts and Stock Trading Trends to gain an understanding of stock charts and trending.

To look at broad trends it is best to look at weekly charts of some of the main broad market indexes, such as the S & P 500 (SPX) or the NASDAQ Composite Index (COMPX).

Let’s have a look at an example:-

Chart provided by stockcharts.com

Obviously you can clearly spot the continuing downward trend from the start of the period until March 09 when the market turned.

But lets also point out the MACD Analysis and as you can see this broadly illustrates the following:-

A Bull market is indicated when the MACD line is above the zero line and above the trigger line.

A Bear market is indicated when the MACD line is below the zero line and below the trigger line.

Dave J.

Keeping an eye on the following sectors will help you spot when a market is about to enter a bearish phase.

Healthcare and other service sectors hit their peak as the market is about to turn downwards. Utility and financial companies also do well as interest rates begin to rise. If stocks in the following sectors begin to have relative strength it is usually a sign of an upcoming bearish phase.

Consumer Services:-

• Healthcare Equipment
• Healthcare Providers
• Pharmaceuticals

Utilities:-

• Electricity Generation & Distribution
• Gas Distribution
• Water

Financial Services:-

• Banks & Brokers
• Insurance

Todd B.

Economic conditions that foster a new bull market include lower interest rates and signs that industrial production is starting to rise.

The stocks of cyclical and technology stocks tend to do well when interest rates are low. These companies often lead the market and can sometimes rally before a recession has completely hit the bottom. As stock traders we can look for positive signs of these sectors improving the industrial production figures to mark the start of an upturn.

The Cyclical Business sectors are:-

• Automobile and components
• Consumer Durables
• Media Companies
• Hotel / Leisure

Technology:-

• Chip Manufacturers
• Computer and Hardware
• Software
• Telecommunications
• IT Services

As the economy continues to grow this leads to a rally in the industrial sectors. Companies with large funding requirements who benefit from low interest rates:-

• Building Products
• Construction and Engineering
• Aerospace and Defence
• Electrical Equipment
• Airlines and Freight

As the market nears the top, basic material stocks, energy stocks and consumer staple company stocks do well. Strong positive signs in these sectors could signal that the market is near it’s peak and may turn bearish.

Basic Materials:-

• Metal & Mining
• Chemical
• Construction Materials
• Paper / Packaging

Energy:-

• Oil & Gas
• Coal
• Refineries

Consumer Staple:-

• Food & Beverage
• Household Products
• Tobacco
• Luxury Goods / Leisure

Dave J.

Keeping an eye on business sector rotation when stock trading is crucial as some sectors perform better at different times in the economic cycle. Some industries perform better at the start of an upturn and yet others perform (relatively) well in downturns.

Stock traders should look to anticipate the state of the economy and where it, and the markets, are headed by looking at how well certain business sectors are performing.

This pattern is known as sector rotation and whilst not a perfect pattern, it tends to repeat itself through economic booms and troughs.

In the next posts we’ll look at which business sectors perform well during sepecific economic cycles. In the meantime, check out our article Analyzing The Stock Markets.

Todd B.

Interest rates and their trends are a key determiner of government economic influence and barometer of the current state of the economy and where it is in the economic cycle.

In general high interest rates are associated with economic highs and low interest rates with economic cycle lows as governments lower rates to stimulate economic activity in a downturn and raise rates to slow down activity.

Despite the fact that there is a significant time lag between any government intervention and actual impact on the economy, the current interest rate is a reasonable indicator of where the economy is heading.

So, interest rate reductions tend to boost the stock markets, whereas interest rate increases have the opposite effect. Falling interest rates are typical during a bullish transition phase in the markets, rising interest rates indicate a bearish transition.

Like I said these are only broad indications but are vital in understanding where the stock markets are headed.

Dave J.

Understanding the current state of the economy is the first step in identifying stock market phases. Over the next series of posts we’ll be demonstrating how to use both fundamental analysis and technical analysis to help you identify which phase the market is in.

To look at the overall state of the economy requires looking at a few basic fundamentals and let’s be honest, if you are a stock trader, you’ll already have a good idea of the situation. Nevertheless, these are worth re-stating.

Interest Rates: Where are they and where are they likely to be headed.

Government Policy: Watch for statements of likely intent from the major government agencies. The FED in the US, the BoE in the UK, etc. Pay particular attention at the moment on any moves regarding quantitative easing (QE).

Business Performance: Is industrial production up, down or static? Which direction is it moving in?

Sector Performance: Which Business sectors are performing well and which ones are not. Remember, some sectors perform better than others at different phases of the economic cycle. (Refer to our article on Analyzing The Stock Markets)

Todd B.