Point and Figure charts

by Stephen Archer
www.archeranalysis.com

Why Point & Figure Charts?

Point & Figure (P&F) charts are one of the simplest and clearest ways to determining the best time to buy and sell shares. The P&F system represents one of the oldest approaches to share market trading. This method takes the technical analysts approach while monitoring supply and demand for each share. And the charts are designed for long-term trading so that the time and cost of trading shares is minimal.

How are Point & Figure Charts Constructed?

In P&F charts both axis are dependent on price rather than one being based on price and the other on date. The key unit in a P&F chart is the point, or unit of price. The point size may change in value along the y-axis to provide consistent and relative price movements. This means that a if a share ranges between $8 and $12, the point size may be 10 cents when the share is below $10 and 20 cents when above. An ‘X’ is placed on the chart to indicate an upward movement and an ‘O’ indicates a downward movement. The graph gets its x-axis dimension via three point reversals. A three-point reversal occurs when either:

Now, let's look at a typical example (Broken Hill). The point size for these values is 20 cents.
 

Dates are added to the chart by replacing an ‘X’ or an ‘O’ by the month number. When the year changes it is written at the bottom of the chart. You will notice that the year labels can be vary in position as the charts movement is dependent on price and not on date. The suspension of trading on particular shares is shown by a ‘?’ in the charts.

The Wyckoff Method

The Wyckoff method is a special type of point & figure chart. It uses a single box reversal instead of the more common three point reversal. It also varies from the standard point & figure chart because it can contain both X’s and O’s in the same column. This will occur whenever there is only a single entry made in a column. For example if we had a single X in a column followed by 3 O’s, the O’s will be displayed in the same column as the X. In a Wyckoff chart there must always be more than one entry in a column.

Let's take an example. The box size for these values is $1.00. Note that a Wyckoff chart can also use high and low data, but for clarity we have selected closing price data only.

On 11/02/98 the chart rose from $55 to $57. This resulted in 3 X’s being plotted in the first column. The very next day there was a pull back of one box to $56. Because we are using a one point reversal, we move to the next column and plot the single O. The next day the price rises again to $57. This again is a reversal, however we do not move to the next column because we have only made one entry in the current column. The upward movement continues until the chart reaches $59 on 17/02/98. Continuing to plot the data in this fashion will produce the chart below:

Other than the two requirements described above, the Wyckoff point & figure chart uses the same principals as a standard three point reversal chart.

When to Buy and Sell

When analysing the charts to determine the best time to buy and sell shares, the following criteria must be evaluated:

1. Patterns
2. Trend Lines
3. Market Indicators
4. Price Objectives

Figure Patterns

Double Top and Double Bottom Formation

Double Top and Double Bottom formations are the most basic of chart patterns. A Double Top is formed when a high is followed by a decline, which is then followed by a rise that exceeds the previous. A Double Bottom is formed in a similar fashion. As we will see later, most other formations are variations on this simple pattern. Generally, formations that consist of more than 3 vertical columns yield better results.

The Triple Top and Triple Bottom Formation

This pattern occurs when a series of 2 or more tops or bottoms is penetrated. Generally this is formed by 5 vertical columns, however it is possible for formation to be spread over multiple columns as shown below:

Bullish and Bearish Triangle Formations

Both triangle formations consist of higher bottoms and lower tops, generally with all prices contained between the bullish support and bearish resistance lines.  The signals for the triangle formations are the first Double Top or Double Bottom signals.

The Bullish and Bearish Signal Formation

The significant feature of a bullish signal formation is a higher bottom followed by a higher top. This often indicates that demand has overcome supply. Consequently a lower top followed by a lower bottom forms a bearish signal formation. This often indicates that supply has overcome demand.

Bullish and Bearish Catapult Formations

A Bullish Catapult Formation consists of a Triple Top Buy Signal, a pullback that produces no bearish signal, followed by a new double top buy.  This formation has three distinct buy points: (i) the Triple Top Buy Signal, (ii) the bottom of the pullback (with a stop a bearish signal – if it should occur), (iii) the Double Top Buy Signal.  A Bearish Catapult Formation is the reverse situation.

Long Tail Down

Long Tail Down

A Long Tail Down must have at least twenty Os down.  A buy signal is given whenever there is a 3 box upside reversal.  A stop-loss can be placed where a double bottom sell signal may occur.

High and Low Pole Formations

A High Pole begins with at least 3 Xs above a previous top.  The formation is completed when there is a reversing column of Os that is at least 50% as long as the column of Xs.  This warns of a topping process.  The Low Pole is the reverse situation.

For more information on Point & Figure patterns see Point & Figure ReferencesReferences.

Trend Lines

The next important issue is whether or not the buy and sell signals are in agreement with the basic trend of the stock. This can be assessed via trend lines. Trend lines can be drawn in Bull’s-Eye Broker by clicking on the starting point and dragging the mouse to the desired end point.

The Bullish Support Line

A bullish support line is drawn from the lowest point on completion of a significant downtrend and is extended up at a 45-degree angle as far right as possible. This line is predictive because it can be drawn as soon as the market has completed its downtrend. This line does not connect points as trend lines often do. An example of a Bullish Support Line is shown below:

Having drawn this, the theory is quite simple. Any sell signals given above this line should be disregarded. This means the share should not be sold until the first sell signal after the bullish support line has been penetrated.

The Bearish Resistance Line

The bearish resistance line is a very similar concept to the bullish support line. It is drawn from the highest point on completion of a significant uptrend and is extended downwards at an angle of 45 degrees as far right as possible. An example of a bearish resistance line is shown below:

Any buy signals given below this line should be disregarded. This means the share should not be purchased until the first buy signal given after penetration of the bearish resistance line.

Market Indicators

Before buying and selling shares, it is necessary to assess 2 market indicators:

Shares should only be purchased when the market as a whole is bullish. Similarly, shares must be selected from industry groups that are bullish and acting better than the rest of the market.

Price Objectives

There are two ways to project price: vertical and horizontal counts.

Vertical Count

Buy – Assuming a 3-box reversal, count the number of Xs in the first move up that produces a buy signal. Multiply this number by 3 and add the product to the lowest X in the column on the right. Sell – Reverse for a sell signal.

Bullish Vertical Count

5 X's up 

3 * 5 = 15 and 35 + 15 = 50 
50 is the upside objective 

Bearish Vertical Count

4 O's down

4 * 3 = 12 and 52 – 12 = 40
40 is the downside objective

Horizontal Count

Buy – Assuming a 3-box reversal, count the number of boxes across the base of the formation that has given a buy signal. Multiply that number by 3 and add it to the price associated with the lowest X. Sell – Reverse for a sell signal.

Bullish Horizontal Count

4 boxes across
3 * 4 = 12 and 35 + 12 = 47
47 is the upside objective

Bearish Horizontal Count 

3 boxes across
3 * 3 = 9 and 52 – 9 = 43
43 is the downside objective

For more information on Price Objectives see References.

Guidelines

Below are some useful guidelines to consider when buying stocks (reverse for selling stocks):