Point & Figure Charting is Economics 101
Point & Figure Charting is conducted along technical lines, adhering to the relationship between supply and demand. Simply stated, we focus on the “price” of a security, because it is the ultimate determinant of supply and demand in the marketplace. When you cut through all the red tape on Wall Street and Bay Street, what moves equity prices is supply and demand. It is Economics 101. We don’t buy bathing suits in the middle of winter or fur coats in the middle of summer. The same forces that move prices in the department store or the supermarket move the stock market. When all is said and done, if there are more buyers than sellers, then price will go up and if there are more sellers than buyers then price will go down. Analyzing the price action of a security can yield important information as to who is winning the battle for that security- supply or demand.
The Point & Figure methodology has been around for over 100 years. One of the first proponents of the methodology was Charles Dow, the first editor of The Wall Street Journal. Charles Dow was a fundamentalist at heart, yet he understood the importance of the supply and demand relationship in any stock. The Point & Figure methodology is still valuable today because it as a logical, organized way of recording the forces of supply and demand. We have reached out to the assistance of Dorsey, Wright & Associates who has taken this time-tested approach and given it new life by applying technology. Relative Strength — analyzing the performance of investment options against one another — is a valuable offshoot of Point & Figure.
Our philosophy, the combination of fundamental analysis with technical analysis, can help stack the odds in your favor. It’s like a musician playing the piano. Restrict him to playing the piano with one hand the music he makes is going to be marginal at best. Let him play the piano with both hands, fundamentals and technicals, and he will make beautiful music. Fundamentals can help answer the question of WHAT to buy and technicals answer the question of WHEN to buy.
We use our primary market indicators to get a measure of overall risk. With the assistance of Dorsey Wright, we use technical market indicators that have been in existence for over forty years to ascertain the overall risk in the market -- to determine whether offense or defense is dictated. We then analyze our broad industry sectors to determine which sector or sectors have good field position. Industry sectors can move in and out of season just like produce in the supermarket. We then select individual stocks that have positive relative strength and have a good probability of outperforming the market. In other words, demand is in control.
Ascertain Market Risk > Determine Offensive Sectors > Fundamentals > Manage the Trade with the Point & Figure Chart
Why Point and Figure Charts
- P&F charts are indigenous to stock market trading which give you both the immediate and long term view.
- Formations, patterns and signals are easy to recognize and interpret, and tend to repeat themselves.
- Trends are readily identified and trendlines can be drawn with amazing ease.
- Valid targets can be established.
- It is the easiest kind of chart to maintain and therefore allows you to follow more stocks, etfs and indexes.
- It should enable the investor to stay on a winner while it is winning and get off a loser quickly.
- The method is dynamic.
- The fixed interval of plotting may be made to fit whatever you want to chart - stocks, bonds, commodities, speculation or investment.
- It ignores the static time factor, the confusing volume indications, and irrelevant minor fluctuations.
Point and Figure Chart Basic
The basic point and figure chart shows a column of X's which means the stock or index is rising. A column of O's means the stock is falling. Columns of X's and O's alternate back and forth -- they never appear in the same column. For the first action taken in a month, a number or letter is used to designate that particular month. This is how we show the time on the chart.
It takes 3 boxes to reverse from one direction to the other. For example, if a stock were trading in a column of X's with a top of 45, it would take a move to 42 to reverse this chart to a column of O's. Going in the other direction, if a stock were trading in a column of O's with a current low at 45, it would need a rally to 48 to reverse the stock back to a column of X's.
Given the price of security XYZ, determine the box value and write the appropriate range of prices in the left margin of the point and figure grid. Start the chart with the number (or letter) corresponding to the present month and place it in the box with the value equal to the previous day’s closing price. Depending on whether the stock price rises or falls during the day, add Xs or Os as required. If the price does not rise or fall the value of one or more boxes, make no chart entry.
If the last entry on the chart is an X, check the stock’s daily high. Add Xs if the stock has gone up one or more units on your grid. If the stock has gone down, look at the daily low to see if a three box reversal has occurred. If so, move over one column and down one row and enter the appropriate number of Os. Make no chart entry if the stock has not moved up enough to warrant more Xs or down enough to receive at least three Os.
If the last entry on the chart is an O, check the stock’s daily low. Add Os if the stock has gone down one or more units on your grid. If the stock has gone up, look at the daily high to see if a three box reversal has occurred. If so, move over one column and up one row and enter the appropriate number of Xs. Make no chart entry if the stock has not moved down enough to warrant more Os or up enough to receive at least three Xs.
Reference to time is made by entering the first action of each month with that month’s number in the grid. For example the first X or O in May would be replaced with a "5". The months October through December are noted by A, B, and C, respectively. It is also useful to write the year below the column in which there is an entry for January of that year.
Here are two examples of how a chart develops.
There are 11 different patterns in the Point & Figure methodology. As chart develop, they will create a series of these patterns. If the series is mostly of positive patterns then demand is in control of that issue. If the series of mostly of negative patterns then supply is in control of that issue. Keep in mind with patterns that they are only one of several things we look at when evaluating any equity. For instance, when the market indicators are suggesting demand is in control of the overall market then the bullish patterns work out better than when the main market indicators are suggesting supply is in control of the overall market. Patterns are especially useful in determining entry points and logical stop loss points.
Using trendlines helps us to make buy/sell decisions. When a trendline is broken, it signals a change in the posture of the stock. The two major trendlines: the bullish support line, and the bearish resistance line, can be used to identify areas of support and resistance in point and figure charts.
- Bullish Support Line: When the stock has formed an apparent bottom, a bullish support line can be drawn. It should start in the box directly below the lowest O in the lowest column and move upward at a 45 degree angle.
- Bearish Resistance Line: This is the reciprocal of the bullish support line. A bearish resistance line is to be drawn above the highest X in the highest column downward at a 45 degree angle.
Relative strength readings are incredibly important in stock selection in all kinds of markets. The relative strength calculation is simply done by dividing the price of the stock by the price of the Dow or any index you choose and then multiplying by 1000. This number can then be plotted on a point and figure chart. RS chart buy signals are given when a column of X's exceeds a previous column of X's. Sell signals are given when a column of O's exceeds a previous column of O's. Relative strength signals generally last about two years and tell the overall trend of a stock. Positive relative strength suggests the stock will outperform the market while negative relative strength suggests the stock will underperform the market. It's also important to watch for reversals for short term guidance.
Say for instance XYZ was at $80 and the Dow was at 2,500. If we divided $80 by 2500 and moved the decimal we would get 32. This number 32 can be plotted just as if it was an $32 stock. Let's say the following week the stock falls to $72 and the Dow dropped to 2000. We now divide $72 by 2000 and get 36. In this case the stock dropped, the Dow dropped but the relative strength chart went up. This tells us that the stock is doing better than the Dow and it is possible that the only reason it is down is that the overall market is down. This stock could be one of the first to snap back when the overall market is ready. Remember according to a University of Chicago Study 75-80% of the risk in a stock is market risk, 20-25% is stock specific risk.
Relative Strength readings are taken daily and plotted on a Point & Figure chart. There three types of relative strength (2 for stocks, one for sectors). A stock can be measured on a relative basis versus the overall market and versus its peer group (other stocks within the same sector). Sector relative strength is a measure of that sector's strength versus the S&P 500.
Stock RS Reading
(Stock Price/Dow) x 1000
Peer RS Reading
(Stock Price/DWA Sector)x 100
Sector RS Reading
There are 4 Combinations of Relative Strength.
|Best: Buy Signal and in X's||Improving: Sell Signal and in X's|
|Good: Buy Signal and in O's||Weakest: Sell Signal and in O's|
Investors will want to pay close attention to Relative Strength as the signals last, on average, two years while column changes last several months. In sector relative strength we pay most attention to the column. Even for traders, you want to be in the strongest relative strength stocks and sectors when going long and in the weakest relative strength stocks and sector when going short.
With the assistance of Dorsey, Wright & Associates we use, measures of momentum and overbought/oversold readings to aid in our interpretation of a stock or an index. The measures are computed by their database, and can be accessed by clients.
Momentum: Following weekly momentum is very helpful when timing trades. A positive weekly momentum suggests higher prices and negative momentum suggests lower prices. Weekly momentum is a shorter term timing tool as changes to positive or negative weekly momentum last seven weeks on average. We can calculate the number at which momentum will change to positive or negative. If the price of a stock is below the price that stock needs to hit in order to change its momentum, then the change number is where the momentum will turn positive. If the price of the stock is above the change number then this is where the weekly momentum will turn negative. See next page for a sample momentum table.
Trading Bands: This is the basic bell curve, giving a picture of whether a stock is overbought or oversold based on a 10 week moving average. 100% overbought is three standard deviations above normal. 100% oversold is three standard deviations below normal. If the stock is 100% overbought, it suggests the stock will correct to normal on the curve. If the stock is 100% oversold, it suggests the stock will bounce to normal. The disadvantage to trading bands is the tails can go out to infinity.
NYSE Bullish Percents
This is our major market indicator which tells us whether to be on the offense or defense. It is calculated by dividing the number of NYSE stocks trading on point and figure buy signals by the total listed on the Exchange. The percent of stocks on buy signals in is then plotted on a grid from 0% to 100%, where each box equals 2%. Levels above 70% are generally considered overbought, and below 30% are considered oversold. The best buy signals come when the NYSE Bullish Percent goes below 30% and then reverses up (must reverse 6%). The best sell signals come when the indicator moves above 70% and then reverses below 70%. There are six degrees of risk associated with this indicator but the most important concept to keep in mind is field position and what team is on the field. When the NYSE Bullish Percent is in X's, the offensive team is on the field and wealth accumulation strategies are the focus. Conversely, when the NYSE Bullish Percent is in O's, the defensive team is on the field and wealth preservation strategies are the focus.
Six Degrees of Risk:
- Bull Alert: Characterized by the bullish percent falling to 30% or below and then reversing up into a column of X's. The traffic light turns green.
- Bull Confirmed: The strongest of market conditions. Characterized by a column of X's exceeding a previous column of X's. The traffic light is green.
- Bull Correction: The bull market is taking a breather though it should resume shortly. The traffic light is yellow.
- Bear Alert: Characterized by a bullish percent falling from above 70% to below. Profits should be taken or positions hedged. The traffic light has turned red.
- Bear Confirmed: The weakest of market conditions. Characterized by a column of O's exceeding a previous column of O's. The traffic light is red.
- Bear Correction: The bear market is taking a breather. Trading rallies could be seen but the bear market will likely resume. The traffic light is flashing red -- look both ways carefully before crossing the intersection.
- Bullish Percents are kept on other markets like the Nasdaq Composite, the Amex, the Optionable Universe, the Nasdaq 100, etc. The main bullish percents used for evaluation though are the NYSE and the Nasdaq or OTC Bullish Percent. This is the first step in the game plan - determining what team is on the field and based upon field position, what types of plays to run.
The exact same methodology that applies to the NYSE can also be applied to any stock index in the world including the Toronto Stock Exchange.
Sector Bullish Percents
Using the same concept as the NYSE Bullish Percent, we keep bullish percent charts of each of 41 industry groups and the Dow Jones Broad Sectors. The percent of stocks on buy signals in each sector is plotted on a grid from 0% to 100%. As with the NYSE bullish percent, the best buy signals come when a sector goes below 30% and then reverses up. The best sell signals come when a sector goes above 70% and then reverses below 70%. The same six signals (or risk levels) apply.
This is the second step of the game plan - determining what sectors have the offensive team on the field. The ideal situation for a sector is as follows:
- Strong Relative Strength
- Bullish Percent chart in X's
- Bullish Percent chart about 50% or lower
Short Term Indicators
NYSE (OTC) Percent of Stocks Above Their 10 Week Moving Average: Charted on the same type of grid as the bullish percents. Buy signals are given when the index goes below 30% and reverses up, as well as when a column of Xs exceeds a previous column of Xs. Sell signals are given when the index goes above 70% and reverses down, as well as when a column of Os exceeds a previous column of Os.
NYSE (OTC) High-Low Index:
This index measures the number of new highs made on the NYSE divided by the number of new highs plus new lows. This number is then recorded on a ten day moving average. The ten day moving average is then plotted on a grid from 0% to 100%. We look at the Percent of Stocks Above their 10 Week Moving Average and the NYSE High-Low Index in conjunction with one another. Buy signals are given when the index goes below 30% and reverses up, as well as when a column of Xs exceeds a previous column of Xs. Sell signals are given when the index goes above 70% and reverses down, as well as when a column of Os exceeds a previous column of Os.
When looking at the short term indicators, we like to see both moving in the same direction to make a short term evaluation of the market. These two short term indicators are also applied to the Nasdaq or OTC market.
There are several different charts we use to evaluated the fix income market. They include the following, the DWA Bond Average
(DWBOND), Dow Jones Corporate Bond Index (DJCORP), Treasury Thirty, Ten and Five Year Yield Indices, as well as the futures.
The DWA Bond Average used to be the Dow Jones 20 Bond Average until they discontinued it in April 2002. We have updated the index and are
maintaining the average under the symbol DWBOND. This index is comprised of 20 long term bonds. This chart remains our primary bond indicator. The signals given are typically long term and in the past have been very accurate. This average is plotted on a point and figure chart with a box size of .20. The average moves slow and does not often give signals, but when they occur, we pay attention. A sell signal, which is given when a column of Os exceeds a previous column of Os, suggests that rates are about to rise. The opposite holds for buy signals.
The Dow Jones Corporate Bond Index (DJCORP) incorporates a total of 96 investment grade, non-callable bonds across the maturity spectrum. As well, it draws issues from the Industrial, Financial and Utility/Telecom sectors. The primary differences between this index and the DWBOND are the equal representations between the sectors and maturities. The DWA 20 Bond index is comprised mostly of long-term bonds and would not benefit from strength seen in shorter maturities or a steepening yield curve. For example, if the yield curve were to steepen in a way that yields on the 10 yr.+ issues rose but 5 to2 yr remained constant the DWBOND index would underperform because the maturities of its components are mostly long term. By evaluating the .25 point charts of the 5yr (FVX), 10yr (TNX) and 30 yr (TYX) yield indices we can get an indication of the how the different maturities are likely to move.
There is a lot of information and it’s all technical in nature. We are trying to establish what security or group of securities is dominating the market. We divide the market in 6 asset classes and use Dynamic Asset Allocation to determine the leaders from – US Equity, International Equity, Fixed Income or Bonds, Currency, Commodities or Cash. From here we can drill down and either increase our equity exposure or increase our cash exposure if warranted to protect our portfolio from the ultimate gyrations that occur in the market over time.
Alphabetical listing of many Point & Figure Phrases
A triple bottom sell signal followed by a lower top and then a double bottom sell signal. It is a bearish pattern.
|Bearish Resistance Line|
This particular trend line is also called the Downtrend Line or often written as BRL for short, and as the word suggests, a stock (or index or ETF or mutual fund or commodity) that is trading below its Bearish Resistance Line is trending lower and is in what we would consider an overall negative or bearish trend. To draw the BRL, you go to the highest column of X’s on the chart, after a sell signal has been given, and place a mark in the box directly above that highest X. From there you go down and over a box, make another mark, then continue this process until your Bearish Resistance Line has been drawn. If the given security vehicle is trading below its Bearish Resistance Line, in an overall downtrend, we would tend to restrict positions taken to shorts. Similar to the Bullish Support Line, it is paramount that you monitor whether the security has penetrated its Bearish Resistance Line, as this would signal a change from what had been a negative trend, to a bullish trend; this would then prompt a change from focusing on shorts to one focused on longs.
|Bearish Signal Reversed|
Series of lower tops and lower bottoms wherein, without a period of accumulation, the stock reverses the pattern with a double top buy signal. To qualify for this pattern, there must be at least seven columns. This is a bullish pattern.
A series of lower tops and higher bottoms occurring at the same time. The chart then comes to a point at which is must break one way or the other. If the breakout is a double bottom, it is considered a bearish triangle pattern. This pattern must be at least 5 columns wide to qualify.
Box size is the change in price of a security represented by a 1 box move in a point and figure chart. The box size typically varies depending on the price of a stock. Stocks between 0 and $5 are plotted at $.25 per box. Stocks between $5 and $20 area plotted at $.50 per box. Stocks between $20 and $100 area plotted at 1 point per box. Stocks between $100 and $200 are plotted at $2 points per box. Stocks above $200 are plotted at $4 points per box.
A triple top buy signal followed by a higher bottom and then a double top buy signal. It is a bullish pattern.
The bullish percent is a measure of the percent of stocks in any universe that are on a Point & Figure buy signal. This percentage is plotted on a grid from 0% to 100%. X’s represent that more stocks are going on buy signals and the offensive team is on the field for that market or sector. O’s represent that more stocks are going on sell signals and the defensive team is on the field for that market or sector. The two lines of demarcation on a bullish percent chart are 30% and 70%. The 30% level and below is the "Green Zone" or low risk area. The 70% level and above is the "Red Zone" or high risk area. Focus on your field position and column for an assessment of risk in that particular market. Bullish percents are a measure of risk in the market, not the direction an index should move.
|Bullish Signal Reversed|
Series of higher tops and higher bottoms wherein, without a period of accumulation, the stock reverses the pattern with a double bottom sell signal. To qualify for this pattern, there must be at least seven columns. This is a bearish pattern.
|Bullish Support Line|
Similarly known as the Uptrend Line or often referred to in our work as the BSL for short. If the stock (or other investment vehicle) is trading above its Bullish Support Line it is said to be in an overall uptrend. The Bullish Support Line is always a 45-degree line, upward sloping to the right. Drawing this Uptrend Line is very easy – once the first buy signal is given, off the bottom or after a period of accumulation (moving sideways), you then go to the lowest-reaching column of O’s in that pattern on the chart and begin drawing the trend line by placing a mark in the box directly below the lowest O. You then move up and over a box and place a second mark, and repeat this process which will result in an upward sloping 45 degree line – this is your Bullish Support Line. In Point & Figure Charting this will always be same. As a general rule, if the security is trading above its Bullish Support Line, in an overall uptrend, your trades should be limited to long positions. It is also crucial to watch for a violation, or penetration, of the Bullish Support Line, as that would be a sign that the overall trend is changing from positive to negative – or from an uptrend to a downtrend. A violation of the Bullish Support Line is a "call to action".
A series of lower tops and higher bottoms occurring at the same time. The chart then comes to a point at which is must break one way or the other. If the breakout is a double top, it is considered a bullish triangle pattern. This pattern must be at least 5 columns wide to qualify.
Numbers in a chart stand for the months of the year. For instance, 1 would signify January, 2 would represent February, 3 for March and so forth. A, B and C are used to denote October, November and December. The numbers at the bottom of the chart note a change from one year to the next - 05 (2005) to 06 (2006). Time is not a consideration in the evaluation of a chart; it is just used as a reference point.
In the Point & Figure methodology there are eleven types of patterns, but for all intents and purposes, nine of these patterns are merely derivatives from the two most basic patterns – that of the double top and double bottom.
A Point & Figure chart is constructed by using the daily high and low prices. A chart can only move one direction a day, continuing in the current column. If the chart cannot continue in the current column, then check for a reversal. A reversal on a Point & Figure chart needs at least 3 boxes. A Point & Figure chart will not necessarily make a movement every day and this differs from a Bar Chart which makes a mark each day. Never in a Point & Figure chart will you see X's in a column of O's or vice versa.
|Color Coding X's and O's|
Red is used to designate O's that were added to the chart the previous day while Green is used to designate X's that were added to the chart the previous day. Blue X's or O's represent intraday movement.
A column of O's exceeds the previous column of O's. The simplest of all sell signals and suggests supply is getting stronger.
A column of X's exceeds the previous column of X's. The simplest of all buy signals and suggests demand is getting stronger.
|Exchange Traded Fund (ETF)|
Exchange Traded Funds are a class of equity vehicles commonly referred to as ETFs. ETFs are baskets of equities, similar to mutual funds, that trade much more like stocks. A mutual fund is managed by a portfolio manager and you don’t often know what equities are held, or in what proportions they have been purchased. ETFs, on the other hand, are transparent in the sense that the investor always has access to the holdings within any ETF product. With an ETF the basket of stocks are designed to closely mirror the movement of an index, such as the S&P 500. Unlike mutual funds, ETFs can be purchased and sold throughout the course of a day, stop and limit orders can be placed, they can be sold short, and they may also be margined. There are thousands of ETFs now available, tracking a myriad of different market and sector indices, commodities, and international markets.
|Favored Sector Status|
Favored Sector Status is a concept we use to gauge the relative health or the potential magnitude of movement within a sector. To get the concept straight, think about the most important longer term attributes you want to see in a stock that you are going to buy. If I were culling down a universe of stocks down to the most technically sound ones, three criteria I would choose would be relative strength signal, relative strength column, and overall trend of the stock. Stocks that are above their bullish support lines, have positive strength signals versus the market and have their relative strength charts in a column of X's, are often the leaders of the market. The Favored Sector concept builds upon these traits to identify those sectors whose members are showing positive technical action versus negative technical action. Four charts are used to determine Favored Sector Status; RSX Chart, RSP Chart, PT Chart, and the Sector Relative Strength chart. For each chart that is in a column of X's (a buy signal for the RSX chart), the sector is awarded a point. If a sector has 3 or 4 points it is considered Favored. An Average sector has 2 points positive and an Un-favored sector only has 1 or 0 points. Focus on those sectors with a Favored status as these groups are most likely to outperform the market.
A rating system that ranges from 0 to 6. The score includes the 5 Basic Attributes that is similar to how we rate Stocks. The score also includes additional parameters, including chart patterns, Moving Averages, Momentum and Percentile Ranking for the fund versus several Market and Peer Groups over several time periods. The Score uses proprietary weightings, but adds up to reflect one-third trend chart attributes and two-thirds Relative Strength attributes. In general, a score of 3 or higher is desirable for buying or holding.
This index measures the number of new highs made on an exchange divided by the number of new highs plus new lows. This number is then recorded on a ten day moving average. The ten day moving average is plotted on a grid from 0% to 100%. We look at the Percent of Stocks Above their 10 Week Moving Average and the NYSE High-Low Index in conjunction with one another. Buy signals are given when the index goes below 30% and reverses up, as well as when a column of Xs exceeds a previous column of Xs. Sell signals are given when the index goes above 70% and then reverses down under 70%, as well as when a column of Os exceeds a previous column of Os. Moves below the 10% level are considered extremely washed out.
|Horizontal Price Objective|
When a notable base has formed on a chart, we typically calculate the price objective using a horizontal count. The Horizontal Price Objective is determined by measuring the size of the base that the stock (or other investment vehicle) has created and broken out from – basically, by measuring the width of this base. The base of the formation must be unbroken. In other words, you must be able to count horizontally across the columns filled with X's and O's without any spaces in between. You find the widest part of the base that is unbroken to count. There are no minimum columns required but you will see many charts where a large area of accumulation was created and then the chart broke out. It is these types of charts where a horizontal count is most effective. For an upside bullish target using a horizontal count, once a buy signal is given, count across the base the commodity has built. Multiply the number of columns across the formation by 3, and then multiply that product by the value per box. Add this number to the bottom, or lowest point of the base formation. This is your horizontal price target. For calculating the bearish horizontal count, you want to see a sell signal and then instead of multiplying the number of columns in the base by 3, you multiply by 2. Then after multiplying that product by the box size, the end result is subtracted from the highest point on the base formation.
A service provided from Dorsey, Wright & Associates that allows the user to see and create his or her own relative strength comparisons amongst a universe of different investment vehicles. For instance, a portfolio of 50 stocks can be compared to one another with the stock having the most relative strength buy signals against others in the assigned group receives the highest ranking.
Our alliance at Dorsey, Wright & Associates, use measures of momentum and overbought/oversold readings to aid in our interpretation of a stock. The measures are computed by our database, and can be accessed by clients. We have three different momentum calculations: daily, weekly, and monthly momentum. Daily momentum is a very short-term trading tool. Following weekly momentum is very helpful when timing trades as well, but it gives a slightly longer horizon. It is an intermediate tool as changes to positive or negative weekly momentum last seven weeks on average. The monthly momentum is used more to highlight or signify a longer-term turnaround.
Using weekly momentum as an example, the calculation is basically a one week moving average compared to a five week moving average. The moving average is also exponentially weighted and smoothed. When the one-week moving average crosses above the five-week, we say the weekly momentum has turned positive. This would suggest higher prices for the stock. When the one-week moving average crosses below the five-week, we say the weekly momentum has turned negative. This would suggest a pullback in the stock, or a sideways consolidation is due. Momentum calculations are used as a supplement, not a substitution for, the Point & Figure chart.
|Mutual Fund Box Sizes|
Because mutual funds are generally less volatile than an individual issue we have to "speed up" the chart. Instead of using a scale of ½ point per box (for a typical mutual fund, trading between $5 and $15), we instead use a default scale, also called the Intermediate scale, of 20 cents per box. The short-term chart is half that size at 10 cents a box. The long-term chart follows the stock scale and is at 50 cents a box for this price range. The boxes sizes differ to produce a sensitivity range that helps you in evaluating that mutual fund. Smaller box sizes make the chart more sensitive also increasing signal noise. Bigger box sizes reduce sensitivity and reduce noise.
|NYSE Bullish Percent|
This is a major market indicator which tells us whether to be on the offense or defense. It is calculated by dividing the number of NYSE stocks trading on point and figure buy signals by the total listed on the Exchange. The percent of stocks on buy signals in is then plotted on a grid from 0% to 100%, where each box equals 2%. Levels above 70% are generally considered overbought, and below 30% are considered oversold. The best buy signals come when the NYSE Bullish Percent goes below 30% and then reverses up (must reverse 6%). The best sell signals come when the indicator moves above 70% and then reverses below 70%. The most important concept to keep in mind is field position and what team is on the field. When the NYSE Bullish Percent is in X's, the offensive team is on the field and wealth accumulation strategies are the focus. Conversely, when the NYSE Bullish Percent is in O's, the defensive team is on the field and wealth preservation strategies are the focus.
|Peer Relative Strength|
Just as the name implies, peer relative strength is a measure of how one security is doing compared to an index of its peers or stocks from the same sector. The daily calculation of peer relative strength is to divide the price of the stock by the corresponding Sector Index. The resulting figure is then plotted on a relative strength chart. A double top buy signal suggests the stock will outperform the peer group longer-term and a double bottom sell signal suggests the stock is under perform the peer group longer-term. For shorter term guidance we look at the column of the Peer Relative Strength Chart. A column of X’s would denote positive near term relative strength while a column of O’s would denote negative near term relative strength.
|Percent of Stocks Above Their 10 Week Moving Average|
A measure of the percent of stocks within a universe that are above their 10 week or 50 day moving average. Charted on the same type of grid as the bullish percents. Buy signals are given when the index goes below 30% and reverses up, as well as when a column of Xs exceeds a previous column of Xs. Sell signals are given when the index goes above 70% and reverses down, as well as when a column of Os exceeds a previous column of Os. This is considered a short term indicator and works best when the signal is moving in concert with the signal of the High-Low Index.
|Percent of Stocks Above Their 30 Week Moving Average|
The number of stocks above their 30 week moving average divided by the total number of stocks on the index. This percentage is then plotted on a grid that goes from 100% to 0%. The 30% level and below is the "Green zone" or oversold territory while the 70% level and above is the "Red zone" or overbought territory. We look at both the column and the signal on this chart. Dan Sullivan of the Chartist found that when the Percent of 30 goes above 80% and then falls below 60% it will see 40% before it sees 80% again, and has worked virtually each time it has happened.
Price objectives are a key component in determining the risk-reward ratio of a trade. There are two types of price objectives, the horizontal price objective and the vertical price objective. The concept behind calculating price objectives is akin to the science of ballistics – how far a bullet will travel after its initial impulse, based on the size of its powder keg, the size and attitude of its barrel, air temperature, and other factors. Both bullish and bearish price objectives can be calculated for a stock depending on its last signal. The vertical price objective is the most often used but the horizontal can be very useful when the chart allows for this type of count. Just because a security has reached its price objective doesn’t mean it can’t continue further. The overall trend is our main guiding factor but the price objective is very useful for initially determining a risk-reward ratio.
Relative strength measures the performance of one security in comparison to another. For example, how Microsoft is performing compared to the S&P 500, or how the U.S. Dollar is doing relative to the Euro. To calculate relative strength, take the price of one security and divide it by the other (the security you want to compare), then plot the daily values on a Point & Figure chart. A relative strength chart is considered to be on a buy signal if the chart is on a double top. A relative strength chart is considered to be on a sell signal if the chart is on a double bottom. Because relative strength signals last on average about two years, we also will look at the column of the relative strength chart for near term guidance. When looking at an index to index relative strength chart and ETF relative strength charts, we do look to the column of the chart for guidance rather than the signal because these baskets of stocks tend to move slower than individual names.
The process of evaluating how much risk you will take on compared to how much reward you can expect to gain on any given trade. Typically when evaluating Risk-Reward, we like to see a two to one ratio, at a minimum. In other words, for every point at risk, we want to have two points potential reward. To determine the "reward" portion of the calculation we look to significant resistance areas on the chart, the top of the trading band, or price objectives. For the "risk" portion of the calculation, determine your stop loss point by either a sell signal or a violation of a major support area like a bullish support line.
|Sector Bell Curve|
A composite picture of where each sector is on its bullish percent chart. To get this composite picture, the vertical axis of 0% to 100% on the bullish percent chart is flipped to the horizontal axis and then the first four letters of each sector are plotted to get an overall feel for where most sectors are on their bullish percent charts. A bell curve that is skewed to the right hand side suggests higher risk while a bell curve that is skewed to the left hand side suggests lower risk in the market.
The selling climax can signal that a stock has made an intermediate-term bottom. The selling climax occurs when a stock makes a new yearly low (52 week) during the week, then closes up for the week. Such action in a stock suggests that the selling pressure has reached a climactic level. When such a selling climax occurs, it can signal that a bottom has been made in the stock. For aggressive investors, this climax can provide a buying opportunity.
A stock forms two tops at a level but does not actually give a double top. This is followed by a double bottom to "shakeout" the weak holders of the stock. The action point to buy on the shakeout pattern is the first three box reversal up after the sell signal. The shakeout pattern is considered complete when the triple top is broken. This pattern must occur above the bullish support line to qualify. Overall a bullish pattern.
An exclusive DWA service allowing the user to customize the box size of their Point & Figure chart as well as create unique relative strength charts of stock vs. stock, stock vs. fund, stock vs. ETF, etc.
|Supply and Demand|
Supply and demand are the economic forces that determine prices, and price movements, in the markets. Supply is represented by holders of a security, who will demand a certain price in order to sell. Demand is represented by buyers, who determine the price at which they are willing to buy. Price movements are determined by the balance of these two forces - oversupply will drive prices down, and higher demand will drive prices up. The Point & Figure chart is a highly effective way to display price movements driven by supply and demand, and enable an analyst to recognize meaningful patterns in those movements.
A ranking system that is applied to all stocks using both trend and relative strength analysis. There are five criteria measured; relative strength signal versus the market, relative strength chart column versus the market, relative strength signal versus the peer group, relative strength chart column versus the peer group, and trend. Stocks with at least 3 out of 5 technical attributes positive are considered to be "solid citizens", and are desirable to buy or hold. Stocks with 2 or fewer technical attributes are most vulnerable to declines.
A trading band is a moving average "envelope" around the price of a security. For every stock, index, ETF, commodity and mutual fund, we take ten weeks of data and put that information, along with a volatility calculation, into a statistical bell curve formal. This gives us an intermediate term "trading band" for the stock. When a stock gets near the top of that ten week trading band or near the 100% overbought level, it tells us to expect a pullback to at least normal. When a stock gets near the bottom of the ten week trading band or near the 100% oversold level, it tells us to expect a rally to at least normal. The stock in question can move the position on the trading band in one of three ways. The stock's price can change, the curve can shift as weeks are deleted and added to the calculation, or a combination of the two. This is a shorter term, secondary indicator that is used to help better time a purchase or sale after trend and relative strength analysis has been performed.
One of the main premises of technical analysis is that prices tend to trend. Therefore, one of the main purposes of a chart is to help in the identification of the overall trend of a given stock, index, mutual fund, ETF or commodity – and to then play the direction of that trend for as long as it stays in force. In the Point & Figure methodology, there are two main trend lines that are used: the Bullish Support Line and the Bearish Resistance Line. It is these trend lines that allow us to easily identify whether the vehicle is in an overall "uptrend", or whether its main trend is negative, and in a "downtrend". Trend lines are very easily drawn using the P&F method, whereas bar charts and other methods can be very subjective in nature. Trends (upward or downward) can stay in force for months or years at a time.
A column of O's exceeds two previous columns of O's or levels of resistance. There can be quadruple bottoms, quintuple bottoms, etc. A bearish pattern.
A column of X's exceeds two previous columns of X's or levels of resistance. There can be quadruple tops, quintuple tops, etc. A bullish pattern.
Triple Witching occurs when stock options, futures and futures options all expire on the same day. It is actually now Quadruple Witching as stock futures also expire on the same day. This phenomenon occurs four times a year; the third Friday in March, June, September and December. These weeks can often bring with it a lot of volatility.
|Vertical Price Objective|
The most common price objective used, the Vertical Price Objective is the default price objective used at the top of charts on the DWA website. To calculate the vertical price objective, look to the column that has the first buy signal off the bottom (following the last sell signal) and count the number of X's in it. You wait for the reversal down into a column of O's before counting the number of X's to ensure there will be no more X's added to the column (otherwise the count is considered to be "incomplete"). Once you have counted the X's, multiply by 3 (for the P&F three-box reversal method) and then multiply that product by the value per box. Add this result to the bottom X, and that is your count or price target. To calculate the downside, bearish target using a vertical price objective, the process is essentially the same, just in reverse with one minor difference. Count the number of O’s in the column after the first sell signal off the top, then multiplying that by 2 (instead of 3), and then multiplying by the value of each box. Then subtract that number from the top O’s price, and that is your bearish price objective.
Volume is the number of shares of a given security being traded in a day. Point & Figure charts do not directly take volume into consideration. The volume of shares being traded may offer an indication of market interest in a stock, but does not directly influence the price. It is the balance of supply and demand that determines price movements.