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Chartered Market Technician Institute

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1 Chartered Market Technician Institute
Point and Figure

2 Point and Figure Charts Introduction
Very different from Bar & Candle Charts Time is not a factor, the account for price only Terminology Point: refers to the location of the price plot Figure: the ability to figure target prices from the points Relatively simple to employ, only prices that meet the “box” and “reversal” size are used The Chart reflects the High and Low, whenever important, which many feel is a better measure of supply and demand, rather than the open and close, which many feel to be arbitrary times

3 One Box (Point) Reversal
Price is Plotted on the vertical axis Time is not scaled Each square or “box” represents 1 point in the price Plot is made only when price of box is touched or traded through Change in plot to a new column is made only when price is trending in one direction and subsequently reverses by the box size or larger One-step-back method (only in 1-box reversal charts) Price reverses direction by the value of 1 box only and then reverses back in the previous direction, leaving an X & an O in the same column See Figure 2-6 & 2-7 (next page) See page 66 thru 75 for step by step construction

4 One Box (Point) Reversal

5 Box Size Multi-Box Reversal
Can be expanded or contracted depending on personal preference The larger the box size, the less noise The smaller the box size, the greater the detail Multi-Box Reversal Reversal can be different from box size 1 Point, 3 Box Reversal the most popular X: used in columns when price is increasing O: used in columns when price is decreasing


7 Time With the start of a new month, a letter or number is used instead of an “X” or an “O” Sometimes a year is recorded as well at the bottom Point size recommendations: 1pt for prices btwn 20 & 100 .5pt for prices btwn 5 & 19.50 .25pt for prices less than 5 2pt for prices greater than 100

8 Figure 11.15

9 Point and Figure Charts key characteristics
“Box” & “Point” are used interchangeably P&F does not take into account time or volume Requires continuous time flow Analyzes all price action Disregards inactive period, concentrates on active Screens out price action that has little predictive ability S&P500 futures vs S&P500 cash

10 Old & New Methods There are 2 variables used to determine Point & Figure Charts Box or Point size The number of boxes for a reversal aka “reversal amount” or “reversal size” Early version was known as one by one Box and reversal sizes were equal Patterns were complex and open to interpretation Accurate as it included all price action Newer version known as the three point reversal Did not require as much data flow, can be estimated from daily closes or high/low methodology Some accuracy lost because intra-day trading ignored Clarifies as well as it ignores noise Two types are very different and require different rules and interpretation Technically 3pt reversal not really point and figure as it does not rely on continuous data

11 One Box Reversal Point and Figure
No longer very popular Patterns are not precise and require and experienced analyst to interpret One advantage: The Count Anticipating the expected move is done by measuring the width of the observed base Consolidation/Congestion area of a one box chart Observation: when price changes occur more frequently at lower level of range, odds favour an upside breakout and vice-versa Box and reversal sizes were equal Trendlines are drawn in the same manner as with bar charts Trendline breaks negate earlier observation

12 Patterns Point and Figure uses both traditional and unique patterns
Traditional: Head and Shoulders Top Unique: Semi-catapult and Fulcrum Semi-Catapult It is a continuation pattern Characteristics: There is a preceding trend A pause or pullback from the trend Price then breaks through the price extreme of the preceding trend (the catapult point) Trend resumes (Bullish examples: figures 3-3, page 117. Bearish examples: figures 3-5, page 118) FULCRUM It is a reversal pattern Easily recognized Holds a reliable count as it is contained by distinct walls Other characteristics A previous trend entering into a consolidation Sideways price action near the trend extreme A “mid-fulcrum” rally of short duration, approximately 15% of the previous trend, should be mistaken as turn in trend (results in a false break or false catapult) Subsequent re-test of the trend extremes A “catapult rally” above the mid-fulcrum rally (breakout from which is called a true or full catapult) Fulcrum variations: A Compound Fulcrum (2 Fulcrums side-by-side) Delayed Ending Fulcrum (second Fulcrum lower than the first – ending diagonal triangle?)

13 See pages 167 to 170 in du Plessis

14 Steps to establishing a horizontal count on a 1-box chart
Look for a congestion pattern Methods for measuring the width Method 1 (best) The count that has the most filled squares is used, not the longest row Even blank squares are counted No exact rules on where to start the count Generally the longer the consolidation the more difficult to count due to smaller rallies and corrections which make it difficult to establish where the range began Method 2 (preferred if number of rows with same number of x & o) Count the width of each row in the pattern, average and round up by 1 The trigger is taken to be the row in the middle of the pattern Method 3 (preferred if there are walls) If the pattern has walls, count across from the start of the right hand wall to and including the left hand wall Method 4 (prefered if willing to wait for breakout) Count the width of the pattern at the breakout or catapult point Either the width between entry and exit walls at the catapult point Or the width of the pattern one row below the catapult point Correlation between range and breakout, “The bigger the base, the higher the space” Project the count up or down Multiply the column count from step 2 by the box size Add / Subtract this value from the row the count was taken Wall: a vertical line marking either side of a consolidation Count is the most valuable feature of the One Box Chart Less precise than the 3 box chart counts


16 Action Points Ideal Selling and Buying Points as outlined by Alexander Wheelan When all of the following conditions appear in a one box point and figure chart, the ideal situation exists: The technical position of the market is favorable A clear and broad fulcrum appears after an extended trend The extreme of the fulcrum fulfils the max count from the start of the previous trend Fulcrum appears against major support or resistance The catapult coincides with the break of a major trendline The catapult occurs at a price level with little support or resistance in space following

17 Three Box Reversal Point and Figure
More popular than one point predecessor Can be plotted from prices found in the newspaper Close only method More popular, only a row of X’s or O’s for the day High/Low method Close is ignored completely Reliance on the trend as long as extremes are made in the direction of prevailing trend, in accordance with the box size, counter trend extreme is ignored If no new extreme, opposite extreme is examined for a potential change See pages 95 to 103 for construction Requires the knowledge of only a few basic patterns Academics like it because these patterns can be tested Can have only X’s or O’s in each column See pages 80 thru 86 for construction Due to asymmetry, reversals can be used as trailing stops

18 The Count in a Three-Point Reversal Chart
Less ambiguous and easier than 1 box charts Two Methods: The Vertical Count The Horizontal Count Doesn’t have establishment and activation stages like vertical count Much price action is lost in the Three Box Reversal, less accurate than the One Box method

19 The Count in a Three-Point Reversal Chart
1. Vertical Count Calculation method Choose a completed column of X’s (establishment): The 1st move off a bottom The second move off a bottom if it is part of a bottoming pattern The completion of a mini-top in an uptrend A second column of X’s if the 1st column is a short column A significant X column breakout Count the number of X’s in the column and calculate Using a completed column, multiply the Xs by the box size and then the reversal size Add this value to the lowest O in the column to the left of the counting column for your upside target Unique to the Three point Reversal Method DO NOT USE THE BOTTOM OF THE PRECEDING PATTERN, USE THE LOW OF THE PRECEDING COLUMN Activate the count on a break of the counting column Reinforces the trend


21 The Count in a Three-Point Reversal Chart
2. Horizontal Count Calculation method 2 methodologies Cohen Sexsmith (less popular) Prerequisites A previous trend A topping or bottoming pattern A Sideways consolidation A turn in trend Congestion Width determines the extent of the move Cohen Methodology Look for a congestion pattern after a trend, marked by walls Count the number of columns across the pattern, including the walls Multiply by 3 and the box size then add to the value of the lowest O Establishment and Activation stages are identical The exit column rises above the highest X in the pattern Logic of the Horizontal Count: the larger the base, the higher the space


23 The Count in a Three-Point Reversal Chart
2. Horizontal Count Calculation method Sexsmith (less popular) Same logic as the 1 box horizontal method (find row with most filled squares) Useful for continuation as well as reversal patterns Risk and Reward: 1st unit of risk below preceding O column (assuming a buy for a 3 box P&F. For a 1 box its below the count row 2nd unit of risk below the basing formation (assuming a buy) Vice versa for a sell (see page 254 for an example)

24 Risk/Reward

25 Pattern characteristics
Sloping bottoms are more bullish Slopping tops are more bearish See pages 129 through 133 Slopping tops and bottoms indicate indecision The breakout/pullback or breakout/retest One of the strongest P&F signals, reinforces the 1st breakout See pages

26 Breakout/Re-test

27 Eight Standard Patterns
Double Top and Double Bottom Rising Bottom and Declining Top Triple Top and Triple Bottom Ascending Triple Top and Descending Triple Bottom Spread Triple Top and Spread Triple Bottom Bullish/Bearish Triangle Above Bullish Resistance/Bearish Support Line Below Bearish Resistance/Bearish Support Line

28 Double Top/Double Bottom
Consists of only 3 Columns Double Top: Two advancing rows, One descending rows Double Bottom: Two descending rows, one advancing rows Different nomenclature than for bar charts “Top” designates the breakout point Bullish Pattern Signal occurs when the 3rd Column breaks above the 1st column All other standard formations except lines have Double Tops or Double Bottoms embedded within Davis found that 80.3% of Double Tops are profitable

29 Figure 16.11

30 Rising Bottoms & Declining Tops
Variation on Double Tops and Bottoms Four Column pattern Rising Bottom: First column of O’s must be below the more recent column Usually the 1st column of lows declines from a much higher level than shown One possible variation is for the prior of X’s to be stronger Declining Top is exact opposite Davis found that 80.4% of Rising Bottoms are profitable

31 Figure 16.12

32 Triple Top and Triple Bottoms
Triple Top occurs when prices break above two prior highs, vice-versa for a Triple Bottom Five Column pattern Provides greater confirmation of a change in trend Tends to be more profitable than a Double Top Davis found that 87.9% of Triple Tops are profitable, 93% of Triple Bottoms

33 Figure 16.13

34 Ascending Triple Tops, Descending Triple Bottom
Varieties of the Triple Top/Triple Bottom Triple Top: Three rising columns, with the second rising column pushing to new highs Two Separate Double Tops Denotes a strong uptrend Opposite for a Descending Triple Bottom Davis found that 79.5% of Ascending Triple Tops are profitable, 83.3% of Triple Bottoms

35 Figure 16.14

36 Spreading Triple Tops & Bottoms
More complicated varieties of the Triple Top/Triple Bottom Fairly infrequent occurrence Requires at least six columns Similar to the Fulcrum as it represents a congestion zone followed by a false breakout and then renewed congestion Requires three separate tops with one or more lesser tops between the major ones Breakout must rise above all tops Triple Top: Three rising columns, with the second rising column pushing to new highs Opposite for a Spreading Triple Bottom Davis found that 85.7% of Spreading Triple Tops are profitable, 86.5% of Triple Bottoms

37 Figure 16.15

38 *only looked at continuation patterns*
Triangles Very rare in Three Box Reversal Land Only larger than normal Triangles captured Davis found poor results: 71.4% of Bullish Triangles are profitable, 87.5% Bearish Triangles were profitable *only looked at continuation patterns*

39 Trendlines Drawn at 45 degree angles for multi-box reversal, subjectively for 1x1 If price can’t maintain a rise of at least the value of 1 box every time it makes a reversal, it can no longer be considered a bull trend Bullish Support Line Drawn from one box below the last observable column (always an O column) Bearish Resistance Line exact opposite General Rules: One should never buy unless price is greater than trendline support One should never sell unless price is less than trendline resistance Trendline breaks only valid if they coincide with a pattern break as well

40 Figure 16.8 in Kirkpatrick andDahlquist
See pages 180 through 183 in du Plessis

41 Rising and Declining Trendlines
In a rising trend, a trendline is drawn at a 45 degree angle from the bottom A subsequent parallel line is drawn off of the earliest peak in that trend Two ways for the lines to give way A break of support – aka “Bullish Reversal Pattern” Indicates a major turn in trend Upward Break through bullish resistance Indicates upward acceleration at the end of a strong move Break of support should have more validity Declining Trendlines seen as the exact opposite of Rising Trendlines Break of trendline resistance aka “Bearish Reversal Pattern”

42 Figure & 16.18

43 Other Patterns Three other patterns of note: Catapult
Spike aka “Long Tail” Shakeout A confirming pattern Results in a pullback or throwback following the breakout from a Triple Top or Triple Bottom Combination of a Double and Triple Top Powerful Pattern which allows for favourable entry Buy 50% on a pullback, stops below the base of the formation, add on a move to new extremes

44 Figure 16.19

45 Other Patterns - continued
Spike aka “Long Tail” A reversal in trend following a trend acceleration How does one define a an acceleration worth of fading? Most practitioners 17-20 (Blumenthal argued 20 boxes, Burke 17-20, Dorsey 20 boxes) Buy on a confirmed reversal

46 Figure 16.20

47 Other Patterns - continued
Shakeout Capitalizes on traders and investors who sell on the first sign of difficulty following an uptrend Criteria: Strong uptrend A Double Bottom formed by 2 columns of O’s A breakdown through the Double Bottom Must occur early in a strong uptrend Buy the reversal Additional Rules: The market in question must be in an uptrend The market should be above bullish support line The stock must form two tops at the same price The reversal from these tops gives a Double Bottom sell signal The sell signal is the first that has occurred Must be showing positive relative strength or be in an uptrend

48 Figure 16.21

49 Traps A pattern completes as expected, but then reverses and breaks out to the other side Bull Trap Bear Trap See page 146 for real life examples in the FTSE

50 Chapter 6 – Point and Figure Charts of Indicators
Advantage of P&F charts on oscillators is to act as a filter Not as useful for indicators that have been smoothed Most useful on three types of indicators Relative Strength which shows trend of relative outperformance Scaling is irrelevant, P&F allows for objective trend definition using the 45 degree trendline Should use log scale 1% boxes Cumulative lines like On Balance Volume Values are arbitrary Identifies the trend in OBV through 45 degree lines Clarifies areas of accumulation and distribution Use arithmetic box which is 1% of OBV range Oscillators like RSI and Momentum Gives cleaner signals and acts as a filter for trend determination 45 degree lines

51 Chapter 7 – Optimization
Helps with decision about box an reversal size Ideal situation is to give you are range of values Can tell you whether close only or H/L construction is preferable Optimization only of value with 3 box reversal charts b/c signals are unambiguous Percentage box sizes should be used Optimization is not the Holy Grail Can only offer a starting point for box and reversal sizes & pattern probabilities after that subjective analysis takes over When employing optimization rules must be specific

52 Chapter 8 – Point and Figure Contribution to Market Breadth
Bullish Percent Measures the percent of (equity) index components showing bullish P&F patterns, specifically Double Tops constructed from 3-box reversal price charts Use only log scale charts of index constituents Bullish patterns remain until they are reversed by a bearish pattern Caveat – index components change over time, use larger indices Performs 2 tasks Indicates how overbought the market is Flashes signals to accumulate or dispose stocks Analysis: 70% means overbought, 30% means oversold, upward bias of equity markets indicates that readings are not symmetrical 50% line is the critical point, Use a 2.5% band around the 50% level Line charts can be overlaid against price, used like other indicators Most useful with divergences Point and Figure has two advantages: Double Top and Double Bottom signals apply Last column tells you the status of the market Column of Xs is bullish Column of Os is bearish More useful than line chart b/c of Filter Percentage box sizes should be used

53 Chapter 9 – Advanced P&F Technicques
Moving Averages Calculated by taking actual or calculated center of each column Decide on column amount, sum and divide Main purpose is to define trend Dual MA cross-over technique using adjacent fibo’s Take signals with the trend, exit positions on signals against the trend With 1 box charts, averages need to be lengthened When using single moving averages, use a longer period MA and signals are generated when prices crosses through the average Example: Double Top buy occurs when both Xs are above the MA Parabolic Stop and Reverse Created by Welles Wilder Trend following technique with an acceleration factor Used to identify and trade with the trend Two types of signals: price pattern or immediately following a SAR Use a slower acceleration factor for a 1 box chart as the congestion patterns are wider Better than 45 degree lines in defining trailing stops in a sharp trend Bollinger Bands Two primary uses: Identify overbought and oversold Shows market volatility through band width Bullish Indication: when price tests upper band and moving average turns to support Bearish Indication: when price tests lower band and moving average turns to resistance Price will cluster against the bands in a strong trend When Bands squeeze to six month narrows, be alert for a reversion to the mean and a sharp move to transpire, count boxes between the bands to help

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