P&F charts smooth out price movements to make support and resistance levels more convincing. From investopedia.com, P&F charts "filter out non-significant price movements". Readings above 70% are considered overbought and readings below 30% are oversold. If the Index crosses back above 30% it is considered a buy and back below 70% is a sell. Of course there are exceptions during extremes.
Check out the relationship between the NYSE Bullish Percent Index and each top and bottom in the S&P 500 since late 2007. The Bullish Percent Index improved drastically from the October low of 2.76% and also diverged with the March S&P lows and printed higher highs (2.76->12.11%) which was a distressed buy signal. It closed at 74.83 today. Watch for $BPNYA to break below 70% as that could be a signal to sell or position shorts. However in this crazy environment you never know what will happen. The index could hit extreme highs. For more information on this index go to
Here is the S&P 500 P&F chart. The column of X's broke through triple top resistance and pierced early '09 highs. Watch to see if we close below 932 (I believe that's where the X hits) and print a column of O's. Until then the S&P will keep defying gravity or trade in a boring channel.
I found another interesting relationship: S&P Bullish Percentage Index to the Volatility Index. The Smoking Securities blog charts out the Bullidex or $BPSPX:$VIX. It measures how much fear is underlying bullishness in the S&P 500. Muy interesante.