What the heck is PB???

Well I'm not going to tell you so there!!!  But I will give you an explanation of what it resembles.  PB stands for Percent Bullish or a mathematical indication of consensus of the traders based on the market.  It assumes that the market is trading price based on what traders believe the market stance is.  In other words, it tries to say what percentage of the market is bullish based on the price relative to prior price behavior.  (Not much to ask for is it??)

Now since I won't tell you exactly how I figure it, let me use an example which will emulate the result I get with my own formula.  If you program this using excel, you will come out with different numbers than I do but you will have an idea of what my PB number will be.

First, let's take the RSI number and play with it a little.  The Relative Strength Index (RSI) is based on a simple formula.  It takes the last 14 days (the number of days is up to you) and adds all the up days and all the down days and then determines a percentage.  For example, we will use a 5 day RSI using the following data. 

Day 1  - Up 5

Day 2 - Up 4

Day 3 - Down 2

Day 4 - Up 8

Day 5 - Down 1

If we put all the ups in a column and add it up they would come to 17.  If we add the downs they would add up to 3.  We then ask ourselves, how much has the market changed the last 5 days.  The answer is 20 cents.  I don't care if it's up or down, just how much has the market changed.  End result, 20 cents...17 + 3 = 20....Ok, I know you get it.  Now we ask ourselves, what percentage of the market has been up.  The answer is 17 divided by 20 or 85%.   This indicates that 85% is the strength of the current move.

Remember, 5 days is not near long enough to test the market.  I like 14 days; however, there is a problem with RSI in the fact that is considers only two points of data.  The previous close verses today's close.  Let me give you an example of two day's worth of data.

Day 1 - High  250   - Low 245   -Close 247

Day 2 - High  253   - Low 230   - Close 248

If you do a straight RSI calculation, the formula will add a +1 to the up column.  What about the fact we closed 18 cents off of the low.  That is a major piece of information which will not show up in the calculation. 

What we can do is then change what price we use to calculate the RSI.  Instead of using just the change in the close from day to day, let's use a change in the "True Range" level.  What is that?  It's the high plus the low plus the close divided by 3.  Here are those numbers for the two days above.

Day 1 - (250+245+247)/3 = 247.33

Day 2 - (253+230+248)/3 = 243.66

Now we have added the actual action in the market to get the number and instead of a plus 1 for the IRS calculation we get a negative 3.66 in the down column.  But wait, this now gives us a down day where we had rejection of the lows at $2.30 and a day that looks very positive is given over to the negative category.  To fix this, we need to change our focus and make sure we understand what the "True Range" really is.  What we can do is use just today's information and not use yesterday IF AND ONLY IF, Yesterdays true range is in today's High and Low range.  (If it's not, we use the true range as the boundary replacing the high or low which ever applies.  This will make sense when you see it.)

To calculate the new RSI or TRSI (True RSI) we just calculate the true range price as above and then check today's close to that price.  On Day-1, the close at 247 is below the Day 1 True range of 247.33 so a -.33 would go into the negative column.  That makes sense since the market closed below the mid point of the daily range.  On Day-2, we would have a positive 4.33.  This then accounts for buying which brought the market back and ended the day with a positive outlook. 

Using those numbers and adding up the positives and negatives, we then add the numbers together and figure what percentage of the changes in the true range is given to the bulls and the remainder goes to the bears.  The end result is a type of percent bullish which we use. 

Now that we have a number, we look to see when the percentage numbers are over 80 on the bull side or under 20 on the bear side as our overbought and oversold indicators.  When the market crosses 50 going higher it is a buy signal and when it goes under 50, it's a sell signal.

So in conclusion, when I say PB is 31% you will know two things.  First, the market is in a bearish posture.  That is because a 31% bullish number is the same as a 69% bearish number.  Second, that based on changes in price movement, the current price is lower than it has been over a longer period of time and odds are very high we are in a down trend.  Now if I say it's 31% bullish but two days ago it was only 18% bullish, then you will know that the market is not as bearish as it was but still is in a bearish posture. That could mean its a good time to sell the market and join in on the trend.  Since markets ebb and flow, this number is relative but it gives us good feed back as to what is happening in the market today, based on the last several days. 

Simple enough right?  Well, you wanted to know and now you do.  Oh and by the way, I don't use True Range at all in mine....but what I use will remain my little secret.  (Except over the years, my computer does all the calculations so even I don't remember how to calculate it).  Anyway, hopefully, you now have a general idea of what I'm talking about when I say the PB is 31%.