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Small-Cap Sunday - These 6 Signals Help Reveal the "Internal Market"

By Bill Spencer July 18, 2020 Facebook Logo Twitter Logo Email Logo LinkedIn Logo

Hi there...

Thanks for stopping by -- it's great to be back in the saddle after a week spent relishing torpor.

I mostly spent my time catching up with friends and acquaintances whom I had managed to overlook these past months.

Today we're going to pick up where we left off in early June...

But first I want to say "Thank You!" to my friend and colleague Doug Fogel for having my back (and yours) while I was away. Doug is a stand-up guy and I'm very glad he stepped up!


Back on June 13th ("Deep In the Heart of the 'Internal Market'"), we saw how P&F charts let us smooth out much of the noise you see on other types of charts, such as line, OHLC bar charts, etc.

You saw that the basic interpretation of P&F charts is dead simple -- the chart is either on a Buy or Sell signal at all times, although at any moment it can be in a column of X's or of O's.

We then looked at one of the most powerful indicators of all, the Bullish Percent Index.

This indicator is an "oscillator" that tracks the percentage of stocks in a particular sector or industry group or index that have done or are doing some particular thing -- such as going on technical 'Buy' signals... trading above their 10-week Moving Average... trading above their 30-week Moving Average... and so on.

We said that, despite its simplicity, this indicator can let us track the market at a very deep level.

Today we're going to go deeper into that by looking at...


There are more than a dozen P&F signals, but we'll only cover the six basic ones here.  The three general types of basic signal are called: Alert, Correction, and Confirmed.

You'll sometimes see these signals referred to as "pairings".  This is because, for every bullish manifestation of a signal you'll find a bearish counterpart.

The six P&F signals we're going to describe are:

  1. Bull Alert and Bear Alert...
  2. Bull Confirmed and Bear Confirmed...
  3. Bull Correction and Bear Correction.

These signals are a bit more sophisticated than Buy or Sell signals.  That's because they're generated based on a combination of circumstances -- such as, what "region" of the chart are we in... what type of column did the chart "flip to"... and was the chart on a Buy or a Sell signal at the time of the reversal.

A Bull Alert is generated when a BPI chart in oversold territory (below 30%) flips to a column of X's.  You can see this "status" on the BPI chart for the Restaurants sector (one of the 45 sectors we track at True Market Insiders).

This signals that the market may be forming a bottom. (In this case, it clearly was).

It's a bullish indication because, for this P&F chart to flip to X's, an additional 6% of stocks in the S&P would have had to have gone on Buy signals while the chart was oversold (washed out). The chart is not yet on a Buy signal. but the smart investor should be "alert" to the possibility that one may be coming.

The Bull Alert's bearish cousin, the Bear Alert signal, forms when the chart is in "overbought" territory (above 70%, shaded in red) and then flips to a column of O's.

Here's an example of a Bear Alert from the Sector BPI of the Real Estate sector.

Again, this is not a Sell signal, but a movement that could be foreshadowing further significant declines.

We see a Bull Confirmed signal when the chart is already on a P&F Buy signal and also in a rising column of X's.  Not surprisingly, the Bull Confirmed signal is considered the strongest status designation.

We can spot a Bull Confirmed signal on this BPI of the Electronics sector:

If Bull Confirmed is the strongest designation, Bear Confirmed is, as you might expect, the weakest designation.

We see a Bear Confirmed signal when a BPI chart is on a P&F Sell signal while in a falling column of O's.

Like in this BPI of the Drugs sector...

A Bull Correction signal occurs when the BPI is on a Buy signal, but the chart itself is in a column of O's, that is, declining.  Of course, the chart will stay on its Buy signal until (if) the current column of O's falls below the previous column of O's.  The reversal into O's is considered a correction within the larger, bullish trend.

In the BPI of the Biomedics Genetics sector, below, you can easily see that the chart is on a Buy signal and that the most recent column, at the far right, is in O's.

Finally, we come to the sixth BPI signal.

If you've been following along, you'll almost definitely be able to say what a Bear Correction signal looks like.  It's a chart in a column of X's while on a P&F Sell signal.

Here's an example, from the Leisure sector.

Again, these are the basic BPI signals.

We'll look at some of the others in the in the future.

Thanks as always for reading.

It's good to be back,

Bill Spencer

Editor-in-Chief, True Market Insiders