Trading with Point & Figure Charts PnF University
Dorseywright.com
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History of Point and Figure Technical Analysis.
A brief history of Point and Figure Charting along with some statistics on sector timing versus market timing.
The premise of Point & Figure charting is to provide a logical, organized and sensible way of recording the supply and demand relationship in any particular security or sector. When it is all said and done, if there are more buyers in a particular security than there are sellers willing to sell, the price will rise. On the other hand, if there are more sellers in a particular security than there are buyers willing to buy, then the price will decline. If buying and selling are equal, the price will remain the same. This is t he irrefutable law of supply and demand. The same reasons that cause price fluctuations in produce such as potatoes, corn and asparagus cause price fluctuations in securities. - taken from the book "Point and Figure Charting" by Tom Dorsey.
The chart above depicts the first style of Point & Figure charts. Over the years, they have evolved. Today, the price is located on the vertical axis and the "figures" are replaced with X's and O's. X's represent demand and are always moving up the chart while O's represent supply and are always moving down the chart.
This methodology was prominent in the 1960's but then dropped out of favor. This form of technical analysis is unique and to become a craftsman requires study. By attending thi s on-line University you are well on your way to becoming a craftsman. You will learn more about this in Lesson 1.
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Welcome:
Lesson 1: Introduction
In this section we will list any Here we go! This chapter is designed to familiarize you with Point and Figure upcoming live online classes Charts, we call these "attributes" in this University. For those that are specifically covering this chapter. familiar with PnF and have used it in their investment research, you will know most of these terms and concepts. However, it is good for a review as terms used in this chapter will be repeated throughout the University. This chapter does include vital information for basic charting and it shouldn't be skipped over as it is a foundation for the following chapters. Chapter 1 is the base and each chapter following is a vital component in understanding the big picture, how to put it all together. One cannot understand the whole without knowing the parts.
Lesson 1 Contents: Part 1: Attributes of a Chart
Part 2:
Attributes Box Scales Dates and date lines Trading bands Numbers and letters for the months
Chart Basics Three box reversal Box scale tables Flow chart of investing Examples of how to chart Support Lines
Part 3: Support Lines
Bullish Support Line Bullish Resistance Line Bearish Resistance Line Bearish Support Line Test yourself at the end of the chapter to sharpen your skills. If you have any questions, please check the "Questions" section to see if it has already been answered. If it has not, then click on the question mark icon below to email us your question. It will be answered shortly (within two business days).
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Welcome:
Lesson 1: Part 1. Attributes of a Chart
Here is a Point and Figure Trend Chart with the characteristics pointed out and described. We will go into detail as we continue through the first lesson. A Point and Figure Trend Chart: The trend chart depicts the price action of the stock. We call it the trend chart because of the support and resistance lines that determine whether a chart is above or below trend. If someone say's "...the trend chart" you know they mean this type of chart, this is different from an RS chart for example.
Key Points:
* X's mean the chart is rising * O's mean the chart is declining. * Never will you see X's in a column of O's or vice versa. * Each column must have at least three X's or three O's.
You will notice some columns have numbers or letters in place of an X or an O. (In blue). These depict months: 1 = January 2 = February 3 = March This continues until October in which... A = October B = November C = December This is because two digit numbers wouldn't fit in the box.
Value / Price column Trading Bands:
Trend Lines:
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The vertical axis is the price scale. From this you can determine the value of each row. These are hyphenated as "Bot" for the bottom of the trading band, "Med" for the medium of the trading band and "Top" for the top of the trading band. Applications of the the Trading Bands will be discussed in later chapters. The Bullish Support Lines and Bearish Resistance Lines help us determine the trend of the stock.
Welcome:
Lesson 1: Part 2. Chart Basics:
Details of the individual chart characteristics. The scale for a point and figure chart is on the left hand side or the vertical axis. By looking at the price increments of the scale we can determine the box size at that level.
Value/ Price Column
Box sizes: Changes are determined by the price range of the stock or index. Here is a guide to those changes.
Examples: What the price columns would look like in the various box sizes:
Crossing Box Sizes: There are times when a stock will cross several box sizes. Here is an example of what that price column would look like:
Price of Stock
Box Size
0.00 - 5.00 5.00 - 20.00 21.00 - 100.00
0.25 0.50 1.00
+ 102.00
2.00
0.25 box
0.50 box
1.0 box
2.0 box
5.00 4.75 4.50 4.25 4.00 3.75 3.50
9.00 8.50 8.00 7.50 7.00 6.50 6.00
40.00 39.00 38.00 37.00 36.00 35.00 34.00
120.00 118.00 116.00 114.00 112.00 110.00 108.00
Notice how the increments work, how the value changes and is determined by the box size.
0.25 to 0.50 box
0.50 to 1.00 box
1.0 to 2.0 box
6.00 5.50 5.00 4.75 4.50 4.25 4.00
22.00 21.00 20.00 19.50 19.00 18.50 18.00
104.00 102.00 100.00 99.00 98.00 97.00 96.00
change here
change here
change here
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Welcome:
Lesson 1: Part 2. Constructing A Chart: Rules for Charting: Learning how to update a Point & Figure chart is fairly simple but there are a couple of ground rules you must first understand. First, the Point & Figure chart uses the high price and the low price for each trading day. Second, the chart continues in the current column if possible. Third, a minimum of three boxes are required to change columns. Finally, a chart can only move in one direction a day. These four rules of charting are most easily understood by looking at them in a Flow Chart format. Flow Chart for PnF Charting: Here is the Flow chart for PnF charting. If you meticulously f ollow this flow chart, you can not go wrong. Following the flow chart we will discuss each question.
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First Flow Chart Question: "Continue Current Column with X or O?" Whichever column the chart is in, you will remain in that column as long as the stock continues moving in that direction. If the chart is currently in a column of X's your first question is, "Did the stock rise one full box or more on the chart?". If it did move one full box, then you record that move by adding another X to the column. You are now done updating that chart for the day. As mentioned above when charting, you are concerned with the price which causes the chart to continue in the current column. In other words we are establ ishing an action point. If the chart is in a column of X's, you are looking at the high price of the day, rounding down to the next whole number. If the chart is in a column of O's, you are looking at the low price of the day, rounding up to the next whole number.
For example, a stock has a high of 28 7/8. For charting we would use this at 28
29 28 27 26 25
X <-28 7/8 is not high enough X to close the 29 box. X X
When looking at the low, you go up to the next whole number. Using the same example, a stock has a low of 28 7/8. You would read this as a low of 29.
32 31 30 29 28
O O O O <-28 7/8 is not low enough to close the 28 box.
For the smaller box sizes you still round to the "whole" numbers in the box.
For example, in the .50 box size if a st ock trades to 10.63 you would mark up to the 10.50 box not the 11.00 box.
11.00 10.50 10.00 9.50 9.00
With the .25 box size if a stock trades to 4.73 for instance, you would mark the boxes to 4.50 not 4.75.
5.00 4.75 4.50 X <-4.73 is not high enough 4.25 X to mark up to the 4.00 X 4.75 box.
X <-10.63 is not high enough X to mark up to the X 11.00 box X
Second Flow Chart Question: "Does Stock Reverse Columns on Chart?" If the answer to the first flow chart question was "no", then we must det ermine whether the chart reverses direction thus changing columns. We use a three box reversal method to determine a reversal.
Three Box Reversal Method: The price action of a stock is marked by two different columns, by X's for the price moving up and O's for the price moving down. In other words, X's are for demand and O's are for supply. To move from one column to the next, from X's to O's or vice versa, Point and Figure charts require a three box reversal. The stock must be able to move three boxes b efore it can change columns. If a stock is in X's at $25 then it must fall 3 boxes to reverse into a column of O's. This would be $3 since the scale of the chart at $25 is $1 per box and it must reverse by three. 0.00 to 5.00 0.75 pts. Reversal Requirements: 5.00 to 20.00 1.50 pts. Use this as a guide. 20.00 to 100.00 3.00 pts. 100.00 to 200.00 6.00 pts.
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Examples: Here are examples of the three box reversals for the different box sizes. 0.00 to 5.00 chart (0.25 box) As shown in this example, the price had to move down or up a total of 0.75 points to complete the three box reversal.
5.00 to 20.00 chart (0.50 box) As shown in this example, the price needed to move 1.50 points down to make a full reversal.
The reversal up, a move from 3.50 to 4.25, is a total of .75 points.
The reversal up, a move from 16 to 17.50, is a total of 1.50 points.
A move down from 4.50 to 3.75, is a total of .75 points. As per the guide above that is the amount needed for the reversals.
The reversal down, a move from 18 to 16.50, is a total of 1.50 points.
20.00 to 100.00 chart (1.0 box) As shown in this example, the stock needed to move 3.00 down to make a full reversal. See how on this chart a larger point move is needed than the previous two.
102.00 + chart (2.0 box) As shown in this example, the stock needed to move 6.00 points down to make a full reversal.
The reversal up, a move from 106 to 112, is a total of 6 points.
The reversal up, a move from 24 to 27, is a total of 3 points. The reversal down, a move from 28 to 25, is a total of 3 points.
The reversal down, a move from 114 to 108, is a total of 6 points.
If the stock does not meet the criteria to reverse (described above) then there is not action on the chart for that day. Unlike a bar chart, a Point and Figure chart won't necessarily make a movement everyday. If the price action of the trading day does not continue the chart in its current direction (f low chart question 1) or change columns (flow chart question 2), no mark is made on the chart.
For example, on the 1 box chart: Let's say a stock trades a high of 32.50 and a low of 29 7/8 and the column of X's are at the 32 level. We'll go into more detai l about this in a little bit.
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33 32 31 30 29
X <-32.50 Isn't high enough X to add an X. X X <-29 7/8 isn't low enough to add O's
PnF Chart Examples: Here we demonstrate how a chart builds over a period of trading days. Beginning Chart High 47.63 Low 43.25 The top X is at the 46 level. The first thing to determine is whether the stock traded as high as 47 to add another X. It has to be 47 even, not 46.999 but 47. Looking at the trade information (High 47.63, Low 43.25) it did trade as high a s 47 so we can add another X to the column. That is all to be done for the day.
Next Trading Day High 47.975 Low 43 Each day is the same process. You look at the high and low to determine if you can continue in the same column or if you have enough for a three box reversal. The high needed to add another X would be 48, but the high was only 47.975, not enough. So now you look to see if it moved low enough for a three box reversal at 44. The low was 43, so yes, it is enough for the three box reversal. In fact it adds four boxes (O's).
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Next Trading Day High 50.125 Low 41.975 We are now in a column of O's so we look first to see if the stock trades low enough to add another O. If it does an O is added no matter how high the stock trades. The stock managed to add another O to the chart because it traded to 41.975 filling the 42 box. We do nothing with the move to 50.125.
Next Trading Day High 50.50 Low 41.45 Again the same procedure. We look to see if the stock traded to 41 to add another O and if not did it trade high enough for a three box reversal up. Even though it traded into the 41 range it did not hit 41 even so therefore, no additional O. Now we check if it traded high enough for a three box reversal up into X's at 45 and it did, it traded as high as the 50 box.
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Welcome:
Lesson 1:
Part 3: Support Lines
One of the most important guides you have in Point and Figure charting is the Bullish Support or Bearish Resistance Lines. It is uncanny how a stock will follow along either the Bullish Support or Bearish Resistance Line. They are like brick walls. A stock is bullish if trading above the bullish support line and bearish if trading below the bearish resistance line. Bullish Support Line.
Serves as a guide for the up trend of a stock. Has a habit of acting like a brick wall. Stocks will often come right down to the bullish support line and then bounce off. To draw the support line, you must first have a buy signal off the bottom. Go to the lowest column of O's and begin drawing a line up at a 45 degree angle. The angle will always be a 45 degree angle.
Once a stock has formed a base of accumulation and gives the first buy signal, we go to the lowest column of O's in the chart pattern and begin drawing a trend line. Starting with with the box directly under that column of O's and diagonally connecting each box upward in a 45 degree angle. This method, unlike bar charts, never connect prices - the angle for the Bullish Support Line (also known as the BSL) is always 45 degrees.
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We will typically give a stock the benefit of the doubt if it gives a sell signal while it is trading close to the Bullish Support Line.
Once a stock is well above the long term bullish support line, short term trend lines can be drawn. When a stock rises significantly above this trend line and gives more buy signals, you can go to the bottom O of that new distribution and draw another trend line. The first Bullish Support line will alway s serve to be the long-term trend line and may very well come into play years later. These shorter term trend lines serve as visual guides for you. The short -term trend lines can also be valuable to the trader in identifying the direction of stocks. Traders often initiate a long trade when the stock has declined near the Bullish Support Line because the stock is then close to the stop -loss point. The most important characteristic of the Point and Figure method is its clear guidelines for entering and exiting a trade. Once of the main keys to successful investing is avoiding the big hit. These guidelines will help you do that.
Example of a chart trading above its BSL, notice the gap in space between the X's and O's and the BSL. We will draw a secondary BSL from the area of accumulation around 18. See how the secondary line would work for traders? It gives a closer support line than the original BSL and with that a closer stop on trades. Not all stocks trade high above the original BSL and the original will be all that is needed but in the case of high flying stocks, secondary lines can be very helpful.
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When the stock penetrates the trend line (the BSL) and simultaneously gives a sell signal, it is critical event and a strong sign to sell the stock. To qualify as a penetration, the trend line must be violated and not just touched. There is no such thing as the line being a little penetrated. It is or it isn't. Below, the stock maintained the trend line all the way up from $15 to $25. Soon after, supply took control of the stock. When the stock hit $21, it not only gave a double bottom sell signal but also violated the Bullish Support Line. The violated support line was the key sign there was a high probability that the trend had change d. *A trend change is when the trend chart turns from negative to positive or vice versa. This correlates to the Bullish Support or Bearish Resistance Line. As long as the stock trades above the BSL it is a positive trend but once it pierces that line the trend becomes negative. We will go over buy and sell signals in Lesson two.
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Welcome:
Lesson 1:
Part 3: Support Lines cont.
Bullish Resistance Line.
The Bullish Resistance line is drawn by moving to the left of the last buy signal and going to the first wall of O's. Remember, it is not the first column of O's but the first wall of O's. A wall of O's is usually that last down move in the stock from which it begins to bottom out. This is the point where demand begins to take the upper hand. Go to the column of X's right next to the wall of O's and begin drawing your trend line, beginning with the empty box above that top X. This line will be a 45 degree angle as is the Bullish Support Line. Typically, a stock will encounter resistance as it moves to the Bullish resistance Line though this line may have to be drawn a number of times. The boundaries of the Bullish Support Line and the Bullish Resistance Line form a trading channel. Here the Bullish Resistance Line is drawn after the Wall of O's, above the column of X's beside it at the 21 dollar box. Bearish Resistance Line.
Exact opposite of the bullish support line. It serves as a guide for the downtrend of a stock. Has a habit of acting like a brick wall. Stocks will often rally right up to the bearish resistance line and then bounce off. To draw the resistance line, you must first have a sell signal from the top. Go to the highest column of X's and begin drawing a line down at a 45 degree angle or a 135 degree angle. Once a stock is well below the bearish resistance line, short term resistance lines can be drawn. The bearish resistance line must be violated and not just touched in order to turn the trend positive. We typically prefer not to go long when below the Bearish Resistance Line. This line, like the Bullish Support Line, can be as strong as a brick wall. We say a stock is bearish when it is on a sell signal and below the Bearish Resistance Line. Be wary of buy signals that come from just below this resistance line as they tend to be false or best suited to traders. Stocks that are moving up to this line typically find formidable resistance there. Also, a stock must be on a buy signal to penetrate the Bearish Resistance Line. Short sales can be initiated in weak stocks when the underlying stock rallies up to the resistance line but is still below it. This is the optimum point to sell short on any of the bearish chart patterns.
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The Bearish Support Line.
The Bearish Support Line is the reciprocal of the Bullish Resistance Line and is drawn by moving to the left of the Bearish Resistance line to the first all of X's. Again, not to the next column of X's but to the first wall of X's. Then move the the first column of O's next to it and begin drawing your support line down from the empty box below the last O. The line, which will automatically be a 135 degree angle by connecting the diagonal boxes, can be used as a guide to identify where any decline might be contained.
The Bearish Resistance Line and the Bearish Support Line, in combination, form a channel that the stock can be expected to trade in. Movement down to the Bearish Support Line is likely to cause bottom fishing as investors create demand supporting the stock at that level. As the stock rises to the resistance level, investors who have been stuck holding the declining stock will elect to sell on rallies
.All the lines together.
With the DWA database only the primary support lines are shown; The Bullish Support and the Be arish Resistance Line.
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Example of a long term Bullish Support Line.
61 | | 61 60 --------+ ---------------------------------------------------+---X ----------------------60 59 | | X O X 59 58 | X | X O X O 58 57 | X O X | X O X O 57 56 | X X O X O X X O X O 56 55 --------+ ---------------------------------------X O X O X O X O X O --2 ------------ Med55 54 | X O X O X O X O X O 54 53 | X B X C O | 1 X O 53 52 | X O | O X * 52 51 | X X X | O X <-- Bounced here 51 50 --------+-----------X O X O X ------7 --X ------X ----------+-O * ----------------------50 49 | X O X O X O X O X O X | * 49 48 | X O X 5 X O X O X O X * 48 47 | X O X O O X X O X O X X * | 47 46 | X O O X O X O X O X O X * | 46 45 -------+-----------X -------- O X O X O X O A O X ----* ----+---------------------------45 44 | X 4 O X O 8 X O X O X <--Bounced here. 44 43 | X O X O X O X 9 X O * 43 42 | X O X O X O O * 42 41 | 3 O X 6 * 41 40 --------+-------X O ------------------------* --------------+---------------------------40 39 * X X * | 39 38 * X O X * Notice how the stock has 38 37 37 * X O X X * traded ab ove the BSL and 36 Break ---->X O X O X * has bounced a couple of times 36 35 of BRL X --1 O X O X ----------------* ------------------------+---------------------------35 34 X O X O X 2 * | 34 33 X O X O * | 33 32 32 X C X * | 31 X X O | * | 31 30 - X O X --+---------------* ----------------------------------+---------------------------30 29 X O X | * | 29 28 X B | * | 28 27 27 O X | * | 26 O X | * | 26 25 O X ------+-----* --------------------------------------------+---------------------------25 24 A X | * | 24 23 O X | * | 23 22 O X * | 22 21 O X * | | 21 20 O X --* --+ ---------------------------------------------------+---------------------------20 19.5 O X * | | 19.5 19.0 O * <-- Bullish Support Line is created. ----------------+---------------------------19.0
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Example of a long term Bearish Resistance Line: 57 | | | | 57 56 * | | | 56 55 ---------------X * <--Bearish Resistance Line created. -----------------| -----------------------55 54 X X O * | | | 54 53 X O X O * | | | 53 52 B O X 1 * | | | 52 | | 51 X C | O * | 51 50 -----------X --| O --------* ----------| --------------------| ----------------------------| -----------------------50 49 X X | O * | | | 49 48 X O X | O X * | | | 48 | | 47 X O X | O X O * | 47 46 X A * 2 X O * | | | 46 45 ---X --9 ----* | O <--Break of BSL | --------------------| ----------------------------| -----------------------45 44 X O X * | O * | | 44 | | 43 * 8 O X * | 3 | * 43 42 O X O * <--Bullish | * | | 42 | | 41 O X * Support | * 41 40 -O * -------Line O -------- X ------| ------* ------------| ----------------------------| -----------------------40 | 39 * | O X X O | * | 39 38 | O X O 6 O | * | | 38 37 | O X O X O | * | | 37 36 | O O X 7 | * | | 36 35 ---------------| --------O X --X O ----| ----------------* --| ---- ------------------------| -----------------------35 34 | O X O 5 8 | * | See how the stock continues to follow the 33 | 4 X O X 9 | * Bearish Resistan ce Line down and bounces 32 | O O X O | | * off the line a couple of times. 31 | O X O | | * | 31 30 ---------------| ------------O --O ----| --------------------| ----* ----------------------| -----------------------30 29 | O | 5 | * | 29 28 | O X 3 O X | * | 28 27 | O X O X O X O | * | 27 | A X C O X O X O | * | 26 26 25 ---------------| ----------------O X O X 1 --6 --8 ----------| ------------6 * ------------| -----------------------25 24 | O X O X O | 5 O <-- Bounce off here. 24 23 | O B | O | X O * | 23 22 | | O | X 9 * | 22 21 | | O | 2 X O X * * | Top21 20 ---------------| ----------------------| --------O ----X ----| ----X O X --X O X O X --X * <-Bounce off here. -20 19.5 | | O X O | X O X O X O X O X O X O * 19.5 19.0 --------------| ----------------------| --------O ----X O --| ---- X O X O X A X O X O X O | * ---------------------19.0 18.5 | | 9 X O | X O X O X O X O B X O | * 18.5
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18.0 --------------| -- --------------------| ------------------18.0 17.5 | | * Med17.5 17.0 --------------| ---- ------------------| 2-----------------17.0 16.5 | | X 16.5 16.0 --------------| ----------------------| X ----------------16.0 15.5 | | X 15.5 15.0 --------------| ----------------------| ------------------15.0 14.5 | | 14.5 14.0 --------------| ----------------------| -------------- Bot14.0 13.5 | | 13.5 13.0 --------------| ----------------------| ------------------13.0 12.5 | | 12.5 12.0 --------------| ----------------------| ------------------12.0 11.5 | | 11.5 11.0 ------------9 | 9 ------------------9 | ------------------11.0
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--------O ----X O X | ----X O 3 O X O ------O X O | ----* O
X O X O X
X O X 4 X
O X O X
--------O X -- B C X O X O X O X O ----------C --O X O X -O X O X O
O X O X O
--------O X O X ----O X O X O X O X
1
--------O X O ------| O X
|
--------O X --------| O X
|
--------O A --------| O X
|
--------O X --------| O 9
|
O
O X O X O
--------------------O | 1 X O | O
O
----------------------------| ----O |
----------------------------| -----|
----------------------------| -----|
----------------------------| -----|
------------------| ----------------------------| ------
Welcome:
Lesson 1:Wrap Up
Lesson 1 is dedicated to familiarize you with Point and Figure charts, basic charting concepts and the three box reversal method. It is important that you understand fully the workings and rules of three box reversals, the box sizes and the flow chart of investing. Without a sound knowledge of this information it will be difficult to understand the following lessons and the more in depth features of Point and Figure. The change of box size is always something that takes a little getting used to and it is highly advisable that you continue to do your own hand charting even after completing this University. The better you familiarize yourself with three box reversals the more comfortable you will be with your skills in PnF charting. Another neat thing to do is pull up a chart on the DWA database, one that has made a significant move during the trade day, and see what the chart looked like be fore the major move. This way you can get a feel of the chart prior to large swings either up or down - see what the chart was telling you ahead of time. I found this to be extremely helpful and a fun exercise to work on daily. Getting the "feel" of the charts will build your confidence as well. Use the DWA database to print charts to keep by hand. You will in time be able to look at a chart with high and low of the day and even during the trade day, and determine the direction of the chart. This becomes almost intuitive in time. If you still find the concept confusing review the lesson again and of course read Tom Dorsey's book "Point and Figure Charting" in chapters 1 and 2. His book has examples to learn from and also his personal experiences. Part 1: Attributes of a Chart
Attributes Box Scales Dates and date lines Trading bands Numbers and letters for the months
Part 2: Chart Basics
Three box reversal Box scale tables Flow chart of investing Examples of how to chart
We will now test you to find your comprehension of the subjects discussed in Lesson 1.
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Testing for Lesson 1: Attributes of a chart 1) Type the appropriate number or letter into the provided field for each corresponding month:
October:
September:
August:
June:
November:
March:
December:
2) Identify a specific attribute of these charts: 83 82 81 80 79 78 77 76 75 74 73 72 71 70
88 87 86 8 84 83 82 81 80 79 78 77 76 75 74 73 72
*
X * X O O X O O X O O X O O X O O --O O O O O ----O
O O O O O O O O O O O O
<--This item here is...? * X B * X * * X X --------X X X X X O X O X X O X O X X O O X X ----O X
X X 1 X X X X X O X X O X X O X X X * X X *
O O O O O O O O O
X X X X X X * X * X X -- * -----Top * X * <--This item is...? *
The Bear Reversal Line I-95 North
The Bearish Resistance Line A Constellation The Bullish Support Line
The Bearish Resistance Line I-95 South
The Bullish Support Line Positive Trading Band A Bullish Terrier
*
-------------- Med
*
*
3) Match the box size to the price range by typing the appropriate letter into each field. You may use the same answer multiple times: Box Size
Price Range
2.00
a: 20.00 - 100
0.75
b: None/ NA
0.25
c: 5.00 - 20.00
0.50
d: 0.00 - 5.00
1.00
e: 102 +
4) Constructing Charts: Answer Yes or No to the following
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a. The Low price of the day and the close price of the day are used to construct a chart.
yes
no
b. The High and Low price of the day is used for constructing a PnF chart
yes
no
c. It is possible for a chart to have no action during the trade day
yes
no
yes
no
yes
no
yes
no
yes
no
yes
no
to see if the stock declined one full box during the day?
yes
no
for the possibility of a reversal up into X's if the stock rose 20 points.
yes
no
d. X = Supply e. A chart can move in more than one column in a day.
f. A chart must be updated and a new column added every day. Flowchart of Investing: If a chart is in a column of X's, you first look to see if the chart reversed down into O's? at the High of the day to see if an X is to be added? If the chart is in O's, you first look
If a chart is in X's at $28 and the low for the da y is $24, the high for the day is $29 and the stock closed at $24.5. The action on the chart would be... Reversal to $24.
Up one row to $29.
No change on the chart.
If a chart is in O's at $19 1-2 and the low for the day is $19 1-8, the high for the day is $21 7-8 and the stock closed at $21. The action on the chart would be... The chart will fall to 19.
No change on The chart will reverse to the upside the chart.
Score Test
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Welcome:
Lesson 2: Introduction
This chapter concentrates on the basic buy and sell signals for all PnF In this section we will list any charts and pattern development. First we will show how supply and upcoming live online classes demand control the movement of the chart and how these signals are specifically covering this chapter. created. Then we will describe the different patterns and how they develop. Every chart develops a pattern which tells a story. I t is through Message Board the understanding of these patterns that we can analyze a chart. Here are the basics.
Lesson 2 Contents: Part 1: Chart Patterns
Battle between supply and demand Double Top/Double Bottom Triple Top/Triple Bottom Catapult formations Triangle formations Spread Triple Tops Shakeout formations Signal Reversed Patterns Long Tail Down High Pole
Part 2:
Price Objectives Vertical Price Objective Bullish Vertical Count Bearish Vertical Count Horizontal Price Objective Bullish Horizontal Count Bearish Horizontal Count Price Objectives with different box sizes. Calculations through changing box sizes. Examples
Test yourself at the end of the chapter to sharpen your skills. If you have any questions, please check the "Questions" section to see if it has already been answered. If it has not, then click on the question mark icon below to email us your question. It will be answered shortly (within two business days).
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Welcome:
Lesson 2: Part 1. Chart Patterns Battle Between Supply and Demand.
The PnF Chart depicts the battle between Supply and Demand. There are two basic signals that develop. They are the Double Top Buy signal and the Double Bottom Sell signal. These are the two most basic patterns and it is imperative that you understand them.
A buy signal shows demand is in control of the stock. It occurs when a column of X's exceeds the previous colomn of X's. The Double Top Break
Double Top
A sell signal shows supply is in control. In this case the stock exceeded the previous column of O's.
Double Top Break
A double top break occurs when a chart, in X's, runs into resistance. Supply gains control and the chart reverses into O's. Demand then regains control of the chart and it reverses back into X's where it rallies to the previous resistance. Here the double top is formed. When the chart is able exceed the this resistance level and rise another box it gives the double top break.
The Double Bottom Break A double bottom break occurs when a chart, in O's, Double Bottom falls to support. Demand gains control and the chart reverses into X's. Supply then regains con trol of the chart and it reverses back into O's where it falls to the previous support. Here the double bottom is formed. When the chart is able exceed the this support level and fall another box it gives the double bottom break.
Double Bottom Break
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The Supply and Demand Scenario. Double Top: 1) For example, IBM rises to 2) Over the next few $60 and meets selling weeks demand once pressure. This selling again creeps back into the stock and causes the pressure exceeds the demand at that price and the price to rise to $60 per stock retreats. Remember, it share. This is causes a three-box reversal back requires a three -box reversal up into a column of X's, to change columns. In this example, the selling pressure was enough to force and IBM now sits at the IBM back to $57, the chart reverses to O's from X's. same level that previously caused supply to enter the market.
3) The question now is whether the sellers that forced the stock back before are still there. The only way to find out if the sellers are still operating at that price is to see how IBM negotiates that level.
If it is again repelled, then the sellers are still there. If it instead is able to move to $61, then we can say that demand has prevailed at this price by exceeding the level where supply had previously gained control. By exceeding this level of resistance the Point and Figure chart gives its most basic buy signal, the Double Top Break. Demand is now in control of this stock.
Double Bottom: 1) In this pattern, supply wins
the match. Instead of IBM exceeding the previous point of resistance, it instead reversed and exceeded the previous level of support. Here the stock first reverses down into O's to the 54 level.
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2) Demand comes into the stock with the price rising to 57 and reverses the chart into a column of X's.
3) The stock encounters selling pressure which drives IBM back down the chart to the 54 level where demand previously took control providing support. However this time, the buyers are not there as before and the selling pressure persists unti l the stock exceeds that level of support. Supply again takes over and the chart reverses back down to 53 exceeding the support at 54 and creating a double bottom sell signal at 53.
Summary: Supply wins and the probability of lower prices come into play. The reason supply overtook demand is not important. What is important is knowing that supply is in control, for in the end, supply and demand cause stocks to move up and down and nothing else.
More Examples: Here the stock rises to $60 a second time where it is repelled. This shows there is resistance at that level. The column of O's exceeding the previous column of O's gives the double botom sell signal, one of the most basic patterns. At this point we do not have enough pieces of the puzzle to say whether to sell the stock. As we conintue through the university all the different pieces will start to come together.
This stock found good support at 54. This is clearly shown on the chart as the price where columns of O's stopped. This is one of the great advantages of Point and Figure charts. They are as clear as it gets. There is no mistaking whether a stock gave a buy or sell signal. In this example, after holding the support, demand regains control and exceeds the previous top at $57 giving the double top buy signal.
The Bullish Signal
We add one more dimension, an added clue, to the pattern this time. In this next pattern, the last column of O's does not extend down as low as the previous column of O's. We call that a rising bottom. It signifies that supply is becoming less a factor in driving the stock. On the other side of the coin, demand is getting stronger as the last column of X's exceeds the previous column of X's giving a double top buy signal. The rising bottom shows us that supply is getting weaker providing added guidance when evaluating the supply-demand relationship of the underlying stock.
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The Bearish Signal
Demand in this case is becoming weaker as the last column of X's fails to reach the previous level. Selling pressure however is increasing as evidenced by the lower column of O's. These clues simply suggest demand is losing strength and supply is gaining strength.
The Bullish and Bearish Signals here are part of Double Top/Double Bottom patterns but when analyzing charts with all patterns types recognizing a se ries of higher bottoms and tops or lower tops and bottoms is crucial in making the right trade or investment decision. So far we have discussed the Double Bottom and Double Top. All other other patterns we will cover are expansions of this basic form. By now, you can see how simple this method is to grasp.
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Triple Top Buy Signal
The Triple Top The buy signal is given when the stock is exactly what exceeds the level that previously caused the name the stock to reverse down. suggests - a chart pattern that rises to a certain price level three times. The first two times the stock visits that level, it is repelled by sellers. The third time the stock rises to that level, it forms the Triple Top.
There are many reasons why a stock will encounter supply at certain levels. Think back to a time when you bought stock thinking it was at a bottom or at least an opportune price level to buy. Instead of rising, the stock immediately declined. We have all had experiences like that. The thought that probably crossed your mind as you saw the stock lose value was that if the stock got back to even you were out! This is a perfectly normal human reaction. When you place that order to get out at your break -even point, you are in essence creating supply at that level. If more sellers are willing to sell their stock at that level than buyers are willing to buy, the stock will decline. The only way we know whether the selling pressure has been exhausted at a particular level is if the stock is able to exceed that price. If the stock is repelled again, the sellers are still there. The more times a stock pulls back from a resistance level, the stronger the breakout will be when it comes. It was said years ago that the degree to which a stock will rise is in exact proportion to the time the stock took in preparation for that move. In other words, the wider the base from which a stock breaks out the higher the stock will rise. This is why we consider the triple top break a stronger pattern than the double top. Triple Bottom Sell Signal. The Triple Bottom sell signal, like the Triple Top, has a high degree of reliability. It is characterized by a stock falling to an area of support three times. The first two times the stock holds and reverses up. The third time there is not enough demand to cause the chart to reverse and instead it exceeds the two previous bottoms giving the triple bottom sell signal.
Consider for a moment an investor who buys a stock at $31 per share and then leaves on vacation for one month. He checks the price
What is he missing in this puzzle? What he is missing is that a battle between supply and demand has been completed with supply winning the
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frequently and notices that his stock is still around the price he paid for it, only down a point. Not bad for a market that had been volatile for the past month. He feels comfortable with the stock as the fundamentals remain in place.
match.
The probability of lower prices is very high. The Triple Bottom sell signal does not mean that the stock will cave in immediately, it suggests that the risk in that position has increased tremendously. Whether this investor chooses to do anything about the signal or not, he should at least be aware of it. If the investor does nothing other than increase his awareness of a potential decline, he is far ahead of the investor who holds the same position without any warning. It is imperative to update the charts. By doing so patterns such as this one will not sneak up on you. The Bullish and Bearish Catapult Formation
The Bullish Catapult is a combination of the Triple Top buy signal and the Double Top buy signal. This pattern is a confidence builder. The Catapult is created when a stock gives a Triple Top buy signal whic is followed by a pullback producing a higher bottom. Following the pullback, demand r egains control and the stock reverses back up and gives a Double Top buy signal. The charts below depict a Bullish Catapult formation. Bullish Catapult First the Triple Top...
Then the Double Top...
Then the Double Top Break
Completed: A triple top followed by a double top break.
Notice the Triple Top buy signal followed by the pullback into a column of O's. Notice how the column produces a higher bottom. The resumption of trend completes the Catapult by giving a Double Top buy signal. To better understand what the Catapult is saying, let's look at each piece of the pattern as illustrated above.
1.)The Triple To p is saying that the stock has a very high probability of rising in price, assuming the market is in a bullish mode. In fact, this type of pattern has a success probability of 87.5% in bull markets.
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2.)The subsequent reversal producing a higher bottom suggests that supply is beginning to dry up or become a less significant factor.
3.)The resumption of trend and subsequent Double Top buy signal simply confirms the Triple Top. This is why it is called a confidence builder.
This is a pattern that you can be aggressive with especially when the overall markets are in a bullish mode, the underlying sector is in a bullish mode, and the fundamentals are superior in the stock (we will cover all of these other aspects in later lessons.).
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Welcome:
Lesson 2: Part 1 continued... Chart Patterns
Bearish Catapult This can be interpreted exactly opposite the Bullish Catapult formation and is particularly useful in timing short sales as it clearly shows supply in control. Watch carefully for this pattern because it suggests lower prices from the underlying stock. Below is an example of how it is formed.
First the Triple Bottom ...
Then the Double Bottom...
Then the Double Bottom Break...
Completed: A triple bottom followed by a double bottom break
Let's break this down some more. Interpreting what this formation is telling us we first see the Triple Bo ttom break, which you have already learned is very negative for the stock.
In the same respects of a Bullish Catapult being a confidence builder the Bearish Catapult is a confirmation of a stock breaking down. The Triple Bottom sell signal is then followed by a lower top and a Double Bottom sell signal, two sell signals in a row along with a lower top.
These two signals together clearly show supply coming into control of the stock and demand drying up. Looking at the two stocks to the right. If they are both recommended on a fundamental basis, in the in the same sector and at the same price, Which one would you buy? Clearly, you would pick the one on the left. The beauty of Point and Figure is that it is very visual, very easy to see which stocks are rising and which are breaking down.
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Bullish Catapult
Bearish Catapult
The Triangle Formation
The Triangle formation is easily identified by the higher bottoms and lower tops. This sounds a little backwards but what is happening is that the chart is a bit confused. There is no clear winner in the battle between Supply and Demand. As the lower tops and higher bottoms develop the chart comes to a point creating the triangle look of the pattern. When the chart comes to a point either supply or demand will have to gain control and either a double top break or a double bottom break will be given. A break to the upside designates a Bullish Triangle and a break to the downside designates a Bearish Triangle. To qualify as a Trian gle, the pattern must have at least five vertical columns. Examples of the Bullish and Bearish Triangle are below. 5 columns needed to complete a triangle. Bullish Triangle
If the pattern resolves itself up, it will give a double top buy signal. The Double Top buy signal simply suggests that demand has won the match and the probability is higher prices in the stock.
Bearish Triangle
If the pattern breaks down the match is won by supply. The Double Bottom sell signal suggests that the probability is lower prices in the stock.
Spread Triple Top Pattern and Spread Triple Bottom Pattern. This pattern is basically the same as the triple top and triple bottom with one exception. The testing of the support or resistance level is not completed in three consecutive columns. For example, a stock may rally and test 55 twice, then on the third trip back up it only reaches 53 before it pulls back again. Then on the fourth atempt it is able to break the 55 level. The stock still exceeds the 55 level it tested three times but there was a "spread" between the second and third atempt. This is one that is best understood by looking at an example. Spread Triple Top A gap in between three columns of X's at the same level.
Spread Triple Top break. A column of X's exceeds the spread triple top.
Spread Triple Bottom. A gap in between three column of O's at the same level.
Spread Triple Bottom break A column of O's exceeds the spread triple bottom.
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The same philosophy applies with these patterns as the Triple Top and Bottom. We will take a look from the Triple Top perspective. In each case, the stock rises to a certain price level and is repelled two times. The third attempt at that price is successful by the stock moving through the level shown by a column of X's exceeding the point of resistance. Since the stock was repelled twice at that same level, there are apparently sell orders there. The reason is not important. What is important is that you know there are sellers at that particular level. The only way to know if demand can overtake the selling pressure is to see how the stock negotiates the level again. Simply stated, if the stock is repelled again at this level of resistance, the sellers are still there. You need not know any more. If the stocks exceeds that level, then demand has overcome the supply that previously caused it to reverse. Notice that in the following two patterns, the stocks are trading at the same price. Consider that both stocks are fundamentally sound and each is being recommended by a major firm on Wall Street. Both stocks are in the same industry group and pay about the same dividend. You have studied the fundamentals of the two stocks and a re now trying to determine which stock to buy. It's the moment of truth. Which stock do you select? Stock A: Spread Triple Top
Stock B: Spread Triple Bottom
Without the chart patterns shown here, you would be in a quandary. Looking at the fundamental data alone, both stocks are equal, therefore both stocks should do about as well in the future. Not so. If you had the benefit of evaluating the Point and Figure charts the selection process would become much easier. With the information and charts above which stock do you select? It doesn't take an in -depth understanding of this method to de termine Stock A is on a buy signal with the probability of higher prices and Stock B is on a sell signal with lower prices likely.
This simple exercise shows why charts are so important and why you can achieve the best results in the market when you use both fundamental and technical analysis.
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Welcome:
Lesson 2: Part 1 continued... Chart Patterns
The Shakeout Formation. This pattern has a high degree of reliability. The Shakeout is relatively new and we have found it very useful in real-life application. It is called the Shakeout because the pattern is deceiving causing some holder of the stock to sell, in effect "shaking out" these weak holders. For the pattern to be a true Shakeout formation, it must have the following attributes.
1. The stock must be in a strong up trend and trading above the Bullish Support Line. 2. The stock must rise to a level where it forms two tops at the same price forming a Double Top. 3. The subsequent reversal of the stock from these two tops must give a Double Bottom sell signal.
Shakeout Pattern
First, this pattern is in a strong up trend.
Then the chart gives a Double Bottom sell signal.
Bearish Signal Reversed.
This pattern must have seven columns to qualify. Each column of X's must be lower than the one before and each column of O's must carry lower than the one pri or to it. Action of this type indicates supply is in control and getting stronger. In this pattern we will see the stock reverse up and quickly, without a period of accumulation, break a double top. This reverses the series of lower tops and often leads to a strong move to the upside. The action point with this chart is the breakout. We wait for the breakout because until it is given supply is in control. We do not see this pattern very often but when we do its one of the best. Bullish Signal Reversed.
This pattern is the reverse of the Bearish Signal Reversed. This pattern shows seven columns of rising bottoms and rising tops. When the last top is made in the seventh column, the stock reverses and without a period of distribution declines to give the Double Bottom sell signal reversing a series of rising bottoms.
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Long Tail Down.
To qualify for a Long Tail Down, we like to see a stock that has declined 20 boxes or more with a reversal up. We are not going to split hairs over 20 boxes down. In fact, we start looking when a stock falls 18 O's down. What we are looking for here is a trade. The next three box reversal to the upside often leads to a decent bounce. When evaluating these plays we want to find stocks that have pulled back to an area of support and we want the reversal to occur fairly quickly. If the stock falls 20 boxes and sits there for 3 months then we wouldn't look for much of a "Dead Cat Bounce".
High Pole Warning Formation.
This pattern is not actually a sell signal. It occurs when a chart exceeds a previous column of X's by at least 3 boxes. Following the rise in X's, the stock must pull back at least 50 percent of that last up-thrust on the chart. The thought behind the formation is that there must be something wrong with the supply -demand relationship if the stock subsequently gave up 50 percent of the last move up. It's a warning that supply might be taking control of the stock. In the example to the right the stock rises above the previous column of X's by four boxes making the move 7 boxes in total. A greater than 50% retracement would be a pullback of 4 boxes or a move to 19.
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Welcome:
Lesson 2: Part 2 - Price Objectives.
Vertical Price Objective and Horizontal Price Objective. This technique is used when evaluating the risk/reward ratio of a stock. It is imperative that you evaluate the risk/reward ratio when investing. This will be covered in detail in later lessons. Price objectives are NOT set in stone, but are a good guideline in determini ng how far a signal can carry a stock. There are two types of counts; the Vertical Price Objective and Horizontal Price Objective. With each type you can determine a bullish and bearish price objective. Each are described below. The Vertical Price Objective. You will hear people ask "What is the PO?" - meaning, "What is the Price Objective?". Typically we use the Vertical count when evaluating price objectives. We prefer to use the Horizontal count when a stock has built a large base. Here are how they are calculated. For the Bullish Vertical Count: Look to the column that has the first buy signal off the bottom 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 up to ensure there will be no more X's added to the column. Once you have counted the X's, multiply by 3 (for the three box reversal method) and then multiply that product by the value per box. Add this result to the bottom X
There are 10 X's in the first column of X's from the L AST sell signal. Multiply 10 times the three box reversal method (3) 10 x 3 = 30 The box size is 1 (we will cover box sizes in a minute) so the calculation now is 30 x 1 which equals 30. Add 30 to the bottom X of the column you counted 30 + 21 = 51. 51 is your price objective.
Let's break it down piece by piece.
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1: Find the last sell signal on the chart
2: Find the column of X's that create the buy signal after the last sell signal.
4: 3: Determine if the run in the column of X's Count the column of X's with the buy signal. has been terminated by a reversal.
5: Determine the price level at the bottom of the column of X's.
6: Start your calculation.
Formula: (# X's)(3)(box size) + bottom X = PO There were 10 X's in the column. 10 x 3 (for the three box reversal). = 30. 30 x 1 (box size) = 30. 30 + 21 (bottom X at the $21 level).= 51 51 is the Vertical Price objective.
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Welcome:
Lesson 2: Part 2 - Price Objectives.
The Bearish Vertical count. Look to the first sell signal off the top and count the number of O's it moves down before reversing back up. You wait for the reversal up into a column of X's before counting the number of O's down to ensure there will be no more O's added to the column. Once you have counted the O's, multiply by 2 (this is where the bearish count is differen t from the bullish count) and then multiply that product by the value per box. This is because the market generally has a bias towards the upside so we multiply by a smaller number. Subtract this result to the top O
Let's break it down. 1: Find the last buy signal on the chart
2: Find the column of O's that create the sell signal after the last buy signal.
3: Determine if the run in the column of O's has been terminated by a reversal.
4: Count the column of O's with the sell signal.
5: Determine the price level at the top of the column of
6: Start your calculation.
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O's.
Formula: (# O's)(2)(box size)-Top O = PO There were 10 O's in the column. 10 x 2 = 20. 20 x 1 (box size) = 20. 31 - 20 (top O at the $31 level). = 11 11 is the Vertical Price objective.
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Welcome:
Lesson 2: Part 2 - Price Objectives- Horizontal Count.
Horizontal Price Objective. The Horizontal Price Objective is determined by measuring the base that a stock has created and broken. Stocks that have formed a large base lend themselves to the horizontal count. Otherwise we would use a vertical count. When a stock creates a large base, we measure its width. The base of the formation must be unbroken. In other words, you must be able to count horizontally the columns filled with X's and O's without any spaces in between. Find the widest part of the base that is unbroken to count. In general, a horizontal count is a judgment call. 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. These are the charts where a horizontal count is most effective - we think of them as powder kegs. The more it builds up the more explosive the breakout can be.
Bullish horizontal count. Once a buy signal is given, count across the base the stock 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 of the formation.
Let's break it down.
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1: 2: Make sure there is a buy signal off an accumulated Find the widest part of the base unbroken, that can
base.
be counted.
3: Count the columns.
4: Find the bottom of the base. Sometimes this is a judgment call too.
5: Calculate the PO.
Formula: (# Col. across the base)(3)(box size ) + bottom of base = PO Widest part of formation is 7 boxes. 7 x 3 (three box reversal) = 21 21 x 1 (box size) = 21. Add 21 to the bottom of the base which is 20 21+ 20 = 41. Horizontal Price objective is 41.
Welcome:
Lesson 2: Part 2 - Price Objectives - Horizontal Count.
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Bearish horizontal count. Once a sell signal is given, count across the base the stock has built. Multiply the number of columns across the formation by 2 and then multiply that product by the value per box. Subtract this number from the top of the base. As with the bearish vertical count we multiply the bearish objective by 2.
Let's break it down. 1: Make sure there is a sell signal off an accumulated base.
2. Find the widest part of the base unbroken, that can be counted.
3: Count the columns.
4: Find the top of the base. Sometimes this is a judgment call .
5: Calculate the PO.
Formula: (# boxes across)(2)(box size)- Top of base = PO Widest part of formation is 8 boxes. 8 x 2 (bearish is 2) = 16 16 x 1 (box size) = 16 Subtract 16 from the top of the base which is 34 34 -16 = 18 Horizontal Price objective is 18. Welcome:
Lesson 2: Part 2: Price Objectives
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Price Objectives with different box sizes. Now that you have the basics down for doing the vertical and horizontal counts adding the different box size calculations will be easier. The box size changes do effect the price objectives of the chart. This is because we are measuring the strength of the move off the bottom and that is measured by the movement in price. So, when the scale changes we must adjust. Sometimes, when a chart crosses over two different box sizes you have to do the calculation twice and add together. L et's start with a table of the calculations. Bullish Vertical Counts:
Box Size
Example: We have 10 X's in a column to Price count. Bottom X is a variable. Objective
Formula
0.25
(X)(3) = (?)( .25) + bottom X = PO
(10)(3) = (30)( .25) = 7.5 + 1.25 = 8.75.
8.75
0.50
(X)(3) = (?)( .50) + bottom X = PO
(10)(3) = (30)( .50) = 15 + 12.50 = 27.50.
27.50
1.00
(X)(3) = (?)( 1) + bottom X = PO
(10)(3) = (30)( 1) = 30 + 21 = 51.
51
2.00
(X)(3) = (?)( 2) + bottom X = PO
(10)(3) = (30)( 2) = 60 + 102 = 162.
162
Examples: 0.25 Box Size. 3.50 3.25 3.00 2.75 2.50 2.25 2.00 1.75 1.50 1.25 1.00
.50 Box Size
X X X X O X O X O X O O O O O
X <--10 X's. X O X O X O X X X X X X<-Bottom X.
17.00 16.50 16.00 15.50 15.00 14.50 14.00 13.50 13.00 12.50 12.00
X X X X O X O X O X O O O O O
X <--10 X's. X O X O X O X X X X X X<-Bottom X.
(10)(3) = (30)( .25) = 7.5 + 1.25 = 8.75. (10)(3) = (30)( .50) = 15 + 12.50 = 27.50.
2.0 Box Size
1.00 Box Size 30 29 28 27 26 25 24 23 22 21 20
X X X X O X O X O X O O O O O
X <--10 X's. X O X O X O X X X X X X<-Bottom X.
(10)(3) = (30)( 1) = 30 + 21 = 51.
120 118 116 114 112 110 108 106 104 102 100
X X X X O X O X O X O O O O O
X <--10 X's. X O X O X O X X X X X X<-Bottom X.
(10)(3) = (30)(2) = 60 + 102 = 162.
You can see here how the momentum changes as the box sizes become higher. Bearish Vertical Counts:
Box Size
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Formula
Example: We have 5 O's in a column to Price count. Top O is variable. Objective
0.25
(O)(2)=(?)( .25) = ? Top O -? = PO
(5)(2) = (10)( .25) = 2.5. 5 - 2.5 = 2.55.
2.5
0.50
(O)(2)=(?)( .50) = ? Top O -? = PO
(5)(2) = (10)( .50) = 5. 15 -5 = 10.
10.
1.00
(O)(2)=(?)( 1) = ? Top O -? = PO
(5)(2) = (10)( 1) = 10. 50 -10 = 40.
40.
2.00
(O)(2)=(?)( 2) = ? Top O -? = PO
(5)(2) = (10)(2) = 20. 150 - 20 = 130.
130.
Examples: 0.25 Box Size.
.50 Box Size
5.50 5.00 4.75 4.50 4.25 4.00 3.75 3.50
15.50 15.00 14.55 14.00 13.50 13.00 12.50 12.00
X X X O <-Top O X X O X O X X O X O X O X X O O O X O <--5 O's
(5)(2) = (10)( .25) = 2.5.
X X X O <-Top O X X O X O X X O X O X O X X O O O X O <--5 O's
5 -2.5 = 2.5. (5)(2) = (10)( .50) = 5
1.00 Box Size
2.00 Box Size
51 50 49 48 47 46 45 44
152 150 148 146 144 142 140 138
X X X O <-Top O X X O X O X X O X O X O X X O O O X O <--5 O's
(5)(2) = (10)( 1) = 10
50 -10 = 40.
15 - 5 = 10.
X X X O <-Top O X X O X O X X O X O X O X X O O O X O <--5 O's
(5)(2) = (10)( 2) = 20
150 - 20 = 130.
For Horizontal Counts it is the same thing. You take the box size and put it into the appropriate slot for calculation. Bullish Horizontal Count. Box Size
Formula
0.25 (boxes)(3) = (?)(.25) + bottom of base = PO
Example. We have 10 boxes and the bottom of t he base is a variable.
Price Objective
(10)(3) = (30)( .25) = 7.5 + 3.5 = 11.
11
0.50
(boxes)(3) = (?)(.50) + bottom of base = PO
(10)(3) = (30)( .50) = 15 + 15 = 30.
30
1.00
(boxes)(3) = (?)(1) + bottom of base = PO
(10)(3) = (30)( 1) = 30 + 35 = 65.
65
2.00
(boxes)(3) = (?)(2) + bottom of base = PO
(10)(3) = (30)( 2) = 60 + 102 = 162.
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Bearish Horizontal Count. Box Size
Formula
Example. We have 10 boxes and the Price bottom of the base is a variable. Objective
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0.25
(boxes)(2) = (?)( .25) = ? Top of base -? = PO (10)(2) = (20)( .25) = 5. 5 - 3.5 = .1.5
1.5
0.50
(boxes)(2) = (?)( .50) = ? Top of base -? = PO (10)(2) = (20)( .50) = 10. 15 -10 = .5
5
1.00
(boxes)(2) = (?)( 1) = ? Top of base -? = PO
(10)(2) = (20)( 1) = 20. 30 - 20 = .10
10
2.00
(boxes)(2) = (?)( 2) = ? Top of base -? = PO
(10)(2) = (20)( 2) = 40. 150 - 40 = .110
110
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Welcome:
Lesson 2: Part 2: Price Objectives
Calculations through changing box sizes. This is where the verti cal counts becomes confusing but as long as you understand the different calculations for the box sizes, you will be able to do this easily. Just add the two calculations together. You will not have this type of calculation with the Horizontal count because it inherently does not cross different box sizes, only the vertical count. .25 to the .50 Box Size
.50 to 1.00 Box Size
1.00 to 2.00 Box Size
Count the X's from the bottom X to the change of count. Here it is three boxes. Do the calculation for the .25 box scale. 3 x 3 = 9 x .25 = 2.25
Count the X's from the bottom X to the change of count. Here it is four boxes. Do the calculation for the .50 box scale. 4 x 3 = 12 x .50 = 6
Count the X's from the bottom X to the change of count. Here it is three boxes. Do the calculation for the 1 box scale. 3 x 3 = 9 x .1 = 9
Now count the remaining X's, which is 7, and do the calculation for the .50 box scale. 7 x 3 = 21 x .50 = 10.5. Add the two totals together. 2.25 + 10.5 = 12.75 + 4.50 = 17.25 Price objective is 17.50 We round up since it falls into the .50 box scale.
Now count the remaining X's, which is 6, and do the calculation for the .50 box scale. 6 x 3 = 18 x 1 = 18. Add the two totals together. 6 + 18 = 24 + 18.50 = 42.50 Price objective is 43. We round up since it falls into the 1 box scale.
Now count the remaining X's, which is 7, and do the calculation for the 2 box scale. 7 x 3 = 21 x 2 = 42. Add the two totals together. 9 + 42 = 51 + 98 = 149 Price objective is 149
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Calculation for O's Remember that you multiply by 2 not 3 for the three box reversal. Everything is in reverse so be aware of which box sizes you are multiplying. .25 to the .50 Box Size
.50 to 1.00 Box Size
1.00 to 2.00 Box Size
Count the O's from the top O to the change of count. Here it is two boxes. Do the calculation for the .50 box scale. 2 x 2 = 4 x .50 = 2
Count the O's from the top O to the change of count. Here it is three boxes. Do the calculation for the 1 box scale. 3x2=6x1=6
Count the O's from the top O to the change of count. Here it is three boxes. Do the calculation for the 2 box scale. 3 x 2 = 6 x 2 = 12
Now count the remaining O's, which is four, and do the calculation for the .25 box scale. 4 x 2 = 8 x .25 = 2. Add the two totals together. 2 + 2 = 4. 5.50 - 4 = 1.50 Price objective is 1.50
Now count the remaining O's, which is three, and do the calculation for the .50 box scale. 3 x 2 = 6 x .50 = 3. Add the two totals together. 6 + 3 = 9. 22 - 9 = 13 Price objective is 13
Now count the remaining O's, which is four, and do the calculation for the 1 box scale. 4 x 2 = 8 x 1 = 8. Add the two totals together. 12 + 8 = 20. 104 - 20 = 84 Price objective is 84
46
Welcome:
Lesson 2: Part 2: Price Objectives
Some Charts to example the Vertical Count. We'll use charts as they appear on a database. 84 83 82 81 80 79 78 77 76 75 74 73 72 71 70 69 68 67 66 65 64 63 62 61 60 59 58 57
X X <--Stock almost hit price objective. This is why we say it is a guide not X O X O an absolute. X O X O X O X O --------------X O X O X ------X O X O X O X O X O X O X O O X O X O X O --------------X ----O --------3 X X X --------------X --------------X X X X X X O X <--Buy Signal. This is the co lumn of X's to count. --X O X --X O X ------------X O X O X O <--Reversal to O's terminating the coulumn of X's. X O 2 O X X O X O X X O X O X --X O --O X ------------* O <--Sell Signal. X X O X <--Bottom X 1 O *
10 x 3 = 30 x 1 = 30 + 58 = 88. Price objective is 88 53 52 51 50 49 48 47 45 44 43 42 41 40 39 38 37 36 35 34
A <--Buy Signal
X X X O Top X O X O X O -------------X O X O X O -------------------X O X 9 X O 7 8 O O X X O <--Sell Signal. Count this column of O's ---------X O X --------O X <--Reversal into X's terminating column of O's. X O X O X O X O X X O * X 5 O O X O X O X O X O X O X O O X O X O X X O X O X O X O X B X O X O -----X O ------------------O X O X O X O X Med X 4 O O O X O X X O X O X O X O X O X 3 O X ----------------------------------- O -<--Stock came very close to the bearish vertical count
10 x 2 = 20 x 1 = 20. 52 - 20 = 32. Price objective is 32. Horizontal Price Objective.
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59 | 58 | X 57 | X X O 56 | X O X O 55 -----+---X --X O ----------------X O 54 X | X O X O X O 53 X O | X O X O X X X X O 52 X O | X O X O X O X O X O X O 51 X O X X O X O X O X O X X O X O 50 -X O X O X O X O X O X O X O X 3 X O 49 X O X O X O X O O O X O X O X 48 X O X 1 X O X O X O X O 47 X O X O X O 2 O X O 46 X O | O X O X O 45 X --| O X O X --------------------* 44 X | O O <--Base support level.
18 x 3 = 54 x 1 = 54 + 44 = 98. Price objective is 98.
48
X <--Breakout of base. X X X X -----X X X Med X <--Widest part of base unbroken.
* -------
Welcome:
Lesson 2:Wrap Up
The battle between Supply and Demand is at the heart of Point and Figure Charting. From this chapter you have all the basics needed to understand patterns and price objectives. You can see how the price movement in a stock creates the patterns. These patterns tell the story of the battle between supply or demand. Once you have a good understandin g of how charts develop and build your confidence with practice, you will be able to recognize chart development quickly and accurately. Once you know the basics you can apply your understanding to any PnF chart. Price objective is a guide, not an absolute . It is useful in helping to determine the risk reward parameters of a trade. Always remember that PnF is an art form, not a science. Lesson 2 Contents:
Part 1: Chart Patterns
Battle between supply and demand Double Top/Double Bottom Triple Top/Triple Bottom Catapult formations Triangle formations Spread Triple Tops Shakeout formations Signal Reversed Patterns Long Tail Down High Pole
Part 2:
Price Objectives Vertical Price Objective Bullish Vertical Count Bearish Vertical Count Horizontal Price Objective Bullish Horizontal Count Bearish Horizontal Count Price Objectives with different box sizes. Calculations through changing box sizes. Examples
We will now test you to find your comprehension of the subjects discussed in Lesson 2.
49
Testing for Lesson 2 Part 1: Chart Patterns 1) Identify the following patterns: There are some trick questions here. You can use the patterns/selections as many times as you think they apply.
O O O O O O
X X X X X
X O X O O X O O X O O O O O
-- Select One --
X X X X X X
O O O O O
X X X X O X X O X X O X
-- Select One --
X X X X X X X O X X O X X O X
O O O O O
-- Select One --
O O X X O X O X O X O X O X O X O O O O X O O O O
-- Select One --
O X O X O X O X O X
50
X X X X X X O X X O X O X O X X O X O X O X O O X -- Select One --
X X X X X X X X X
O O O O O O O
X X X X X X
O O O O O
X X O X O X O O O
-- Select One --
X X X O X O X X O X O X O X O O X O X O X O X X -- Select One --
X X X X X X X X X
O O O O O O O
X X X X X X
O O O O O
X X X X O X X O X X O
-- Select One --
X X O X X O X O X
X
O X O X O O X O X O O O O O
X X X X X X
-- Select One --
X X X X X X X
O O O O O
X X X X X O X X O X O
O O O O O
X X X X
O O O O O
X X X X
O O O O O
X X X X
-- Select One --
O O O O
X X X X X O X X O X O
X X X X X X X X X X
-- Select One --
O X O X O X X O X O X O X X O O X O X O X O O X O X O O X O
-- Select One --
2) Which pattern must have exceeded a previous column of X's by at least 3 boxes and must pull back at least 50 percent of that last up-thrust on the chart?
Bearish Signal Reversed
Bullish Catapult
Bullish Triangle
High Pole Warning
Shakeout Pattern
None
3) Which Pattern ideally has the following characteristics? The stock must be in a strong up trend. The stock should be trading above the Bullish Support Line. The stock must rise to a level where it forms two tops at the same price. The subsequent reversal of the stock from these two tops must give a Double Bottom sell signal.
Bearish Signal Reversed
Bullish Catapult
Bullish Triangle
High Pole
Shakeout Pattern
None
4) To qualify as a Triangle, the pattern must have how many columns? 7
5
6
10
5) The combination of a Triple Top and a Double Top make up which pattern?
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Bearish Signal Reversed
Bullish Catapult
Bullish Triangle
High Pole
Shakeout Pattern
None
6) Can the Bearish Catapult have any sell signals in the combination? Yes No ( trick question - the Bearish Catapult naturally has sell signals)
Part 2: Price Objectives 1) Vertical Counts: Do the Vertical Count on the following patterns and match them to the given prices. Remember, some may be rounded up or down because of the change in box sizes. Hint - Both positive and negative counts are represented here. 82 81 80 79 78 77 76 75 74 73 72 71 70 69 68 67 66 65 64 63 62 61 60
X X X X X X X X X
O O O O O O O
X X X X X X X X
-Select One-
11.5
52
O O O O O
X X 3 X X
X X O X O X O X O
O O O O O O O
X X X X X X X X X X X X X X X X X X X
O O O O
57 56 55 54 53 52 51 50 49 48 47 46 45 44 43 42 41 40 39 38 37 36 35
X X X O X X X X O X O X 1 O X O X O X O X X O X O X O O 2 X O X O O X X O X O X X O O X X X
-Select One-
8.5
X
11.0 10.5 10.0 9.5 9.0 8.5 8.0 7.5 7.0 6.5 6.0
X X X X 3 X O X X O X X O X X O X
8.0 7.5 7.0 6.5 6.0 5.5 5.0 4.75 4.50 4.25 4.00 3.75 3.50
O X O X X O O X O X O O X O X O O O X O X O
-Select One-
280 276 272 268 264 260 256 252 248 244 240 236 232 228 224 220
X X X X X X X X X X X X X X X X
O O O O O O O O O O O O
X X X X X X X X X X X
X X X X X X X X X X X X
O O O O O O O O O O O
X X X 1 X O X X O X X O X X
O O O O O O
X X X X X X X X 2 X O X X O X O
O O O O
-Select One-
O O O O O O O O O O O O O
X X 2 X X
114 112 110 108 106 104 102 100 99 98 97 96 95
O O O X O X O X O
-Select One-
O O O O O O O O
X X X X X X
O O O O O O O O
X X O X O X O X X X X X X X
-Select One-
2) Horizontal Counts: Do the Horizontal Count on the following: Hint: Both negative and positive are represented here. 142 140 138 136 134 132 130 128 126 124 122 120
X O X O O X O O X O O O O O O O O
X X X X O X O X O X O X O X O X O O X O X O O
X X O X O X O X O X O X O O O
X X O X O X X O X X O X X O X O X X O X O O
-Select One-
16.0 15.5 *
X
53
15.0 14.5 14.0 13.5 13.0 12.5 12.0 11.5 11.0 10.5 10.0 9.5 9.0 8.5
X X X X
* O O O O O O 6 O O
* * * *
X * X 7 8 X B X X O X O X O X O X X X O X O X O X O X O X O O O C X O X O 1 *
X X X X X X O X O 3 O X O X O * O X * O * *
-Select One-
114 O 112 O 110 O 108 O * 106 O * 104 O * 102 O 100 -O ----X ----------X 99 O X X O X X 98 O X O X O X X O X 97 O X O X O X O X O X 96 O X O X 2 X O X O X 95 O X O X O X O X O X 94 O X O X O X O X O X 93 O X O O X O X O X 92 O X O X O X O X 91 O X O X O O X 90 O O O
X X X * X -- *-------X O X X X O X O X O X O X O X O X O X 3 X O X O X O X O X O X O O * O X * * O X * O * *
-Select One-
154 152 150 148 146 144 142 140 138 136 134 132
O O O O O O
X X X X X X
O O O O O O O
-Select OneScore Test
54
X X X X X X X
O O O O O O O
X X X X X X X
O O O O O O O
X X X X X X
O O O O O
X X X X X
O O O O O O O O O
X X X X X X X
O O O O
Welcome:
Lesson 3: Introduction
Now that you understand how patterns develop and what is a bullish or In this section we will list any bearish signal, this chapter will teach you how to gauge those signals upcoming live online classes against the market using relative strength. specifically covering this chapter. In any market there are always leaders and laggards. Our goal as investors, is to have a portfolio of leaders, not laggards. The tool we use to determine which stocks and sectors are the leaders is Relative Strength. Lesson 3 Contents: Part 1: Relative Strength Evaluating Potential Scenarios Formula
Message Board
Part 2: Coca-Cola Example Wal-Mart Example Various Examples
Test yourself at the end of the chapter to sharpen your skills. If you have any questions, please check the "Questions" section to see if it has already been answered. If it has not, then click on the question mark icon below to email us your question. It will be answered shortly (within two business days).
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Welcome:
Lesson 3: Part 1 - Relative Strength
One of the most important tools in a Point and Figure toolbox is the relative strength chart. The basic objective of all investors is to outperform the broad averages and the only whay to do that is to own stocks that are outperforming the averages. The best way to tell whether your stock is outperforming is to evaluate its performance relative to a market average.
Example of an RS chart from the DWA database
9.0 8.5 8.0 7.5 7.0 6.5 6.0 5.5 Relative strength calculations help investors choose between stocks that superficially appear 5.0 to be similar. Let's say you were evaluating three 4.75 4.50 stocks in the same industry group. Each stock is 4.25 fundamentally sound and the Point and Figure 4.00 trend charts are similar. The only difference 3.75 between the three stocks is that only one has a 3.50 positive relative strength chart. Which one do you 3.25 choose? The logical selection would be the stock 3.00 with the positive relative strength chart. 2.75 2.50 Relative strength charts are very long-term and 2.25 are only updated once a week (although, you can 2.00 see a progression of the RS daily on the DWA 1.75 site). These charts don't speak often, but when 1.50 they do you should listen. In many cases, the 1.25 market is in a condition where the defensive team 1.00 should be on the field and you should not be 0.75 buying stocks but moving to 100% cash doesn't 0.50 make sense. In such markets, relative strength 0.25 really comes in handy as these charts clearly 0.00
show those stocks which are outperforming relative to the averages even though they might be declining in price. In down markets, it pays to keep lists of stocks that are demonstrating superior relative strength versus the broad averages. These strong stocks will be your buy list when the offensive team comes back on the field. Have patience and try to make long stock commitments only when the odds are in your favor.
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----+-+-+--------------| | | ----| | | -------------| | | ----| | 3 -------------| | X O ----| | X O -----------| | 2 5 ----| | X O -----------| | 1 ----| | X -------------| | C ----| | X -------------| | X ----| | B -------------| | 9 ----| | 2 -------------| | 1 ----| | X -------------7 | C ----4 O 8 -------------A O 7 ----8 6 X -------------7 O X ----X O | -------------1 | | ----X | | -------------X | | ----A +-+--------------9 9 9 9 0 6 7 8 9 0
When looking at a Relative Strength Chart we exam ine the buy and sell signals as well as the current column. A Relative Strength (RS) buy or sell signal lasts on average 2 to 2 1/2 years. A column change can indicate performance for the next 6 to 8 months, so it is very important to watch as well. At DWA there are currently two Relative Strength (RS) calculations to use; one the standard and main RS versus the Dow Jones Industrial, and the other is one developed by DWA, the RS versus the sector. We will concentrate primarily on the RS versus the Dow. RS Reading is plotted on a PnF chart. A double top signals a positive relative strength reading and a double bottom signals a negative relative strength reading. A RS on a "buy" signal is one that has broken a double top and an RS on a "sell" is one that has broken a double bottom.
Positive relative strength doesn't mean the stock has to go up and vice versa. It just means it is out performing or under performing the market. For instance, if the market goes up 15% and a negative RS stock goes up 5%, it has unde r performed just as the RS chart suggested. Conversely, if the market goes down 20% but a positive RS stock only goes down 10% then it has done as expected, performed better than the market.
There are four potential scenarios for a PnF chart. They are as follows: RS on a Buy signal in a column of X's. This is the strongest reading for an RS chart. It has been consistently out performing and still is. RS on a Buy signal in a column of O's. This means the stock has been consistently out performing, is taking a breather. RS on a Sell signal in a column of X's. The stock has been under performing most of the time but currently may be on a run. This is good for short term traders that are in and out of stocks. RS on a Sell signal and in a column of O's. The worst of all RS conditions. Has been and still is under performing the market.
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Welcome:
Lesson 3: Part 1 Relative Strength (Cont.)
The stock price is divided by the Dow close and then multiplied by 1000. This formula gives you the RS reading which is then plotted on a Point and Figure chart. This calculation is perfomed on a weekly basis using Tuesdays closing prices.
Consider the following example. (This example is used just to show you the math.) Your stock is trading at $80 per share and Dow Jones is at the 10,000 level ( numbers created for easy calculation). To determine how your stock is trading relative to the Dow, you would simply divide the price of the stock by the Dow, multiply by 1000 and then plot the resulting number exactly as you would a normal Point and Figure chart. If we divide $80 by 10,000, multiply by 1000 we get a figure of 8. This can then be plotted on a graph similar to the one we use for plotting the actual price of the stock. The charting principles are the same as when updating these charts. We first look to see if the chart can continue in the same direction. If not then check for a reversal. Date: 2/2/?? Dow Jones: 10000 Stock Price: 80 Calculation: 80 divided by 10000 x 1000 = 8
58
W e pick up the RS chart with this picture. 12.5 12.0 11.5 11.0 10.5 10.0 9.5 9.0 8.5 8.0
X
<-The RS plotted
A different example... Date: 3/2/?? Dow Jones: 11,000. XYZ Corp: 81. Calculation: (81 / 11000)(1000) = 7.36
7.36 as you can see is not a number on the chart but as with the trend charts we either round up or round down to the correct amount. 7.36 is not enough to plot 7.5 so we use 7.0
Date: 3/9/?? Dow Jones: 9500 XYZ Corp: 74 Calculation: (74 / 9500)(1000) = 7.79.
The Dow has dropped as has the stock but the RS has improved. Like the first example 7.79 is not enough to fill in the 8.0 box so we mark up only to the 7.5 box. While the stock price has fallen and the market has fallen, the relative strength calculation has actually moved higher. This means the stock is performing better relative to the market.
9.5 9.0 8.5 8.0 7.5 7.0 X 6.5 X 6.0 X 5.5 X 5.0 4.5 9.5 9.0 8.5 8.0 7.5 7.0 6.5 6.0 5.5 5.0 4.75
<--RS
plotted.
X <--added another X X X X X
When starting an RS chart it is just like beginning a trend chart in PnF. You must determine which direction the chart is heading before you can plot it. For stocks that have been trading for some time you can get a history of the stock price and Dow and do your own calculations to determine if the RS has been moving up or down. In the case of an IPO however, the history is not there and you must wait for the calculations to guide you. Just keep a running list of the readings.
59
Welcome:
Lesson 3: Part 2 - Examples
Let's look at an example of a Relative Strength chart with Coca -Cola (KO) Clearly KO has under performed since the RS sell signal on 1/12/99. The current reversal up to X's is a positive sign but an RS reading of 6.5 would be required for a Relative Strength buy signal. January 12, 1999 KO : 65.438 DJIA: 9474.68 June 19, 2000 KO: 54.438 DJIA: 10557.83 Performance from January 12, 1999 to June 19, 2000 KO: -16.8% DJIA : +11.4%
9.5 9.0 8.5 8.0 7.5 7.0 6.5 6.0 5.5 5.0 4.75 4.50 4.25 4.00 3.75 3.50 3.25 3.00 2.75 2.50 2.25 2.00 1.75 0.25 0.00
| ----8 7 ----5 A ----B C ----X B ----8 4 ----X A ----8 5 ----B A ----X 7 ----X X ----4 | 8 9 --5 7
| X | | +-6 O +-------O X O | O X 9 +-------9 O | +---1 <--1/12/99 | 3 | +---6 B ------| 8 X O +---9 X O 5 --| A | 3 X +---+-+-O X --| | | O +---+-+-------| | | +---+-+-------| | | +---+-+-------| | | +---+-+-------| | | +---+-+-------| | | 9 9 9 9 0 +-8 9 +-0 -----
Remember back to the very beginning in "Attributes of a chart" the description of the numbers and letters in the columns of PnF chart - 1,2,3 or A, B, C? They designate the first action of a given month. We use the same numbers and letters in a RS chart. They serve as useful guides to help you determine how a stock was performing at a given time. With so little action on RS charts often there is no action during a given month. Below are a couple of examples of RS charts along with their trend charts.
Some Examples:
60
Wal-Mart Stores (WMT). The attributes of the chart are marked to correspond to the RS chart. Trend chart for WMT.
Relative Strength Chart for WMT 7.5 | | | | 7.0---+-+-+---+-----6.5 | | | | 6.0---+-+-+---X ---C O 5.5 | | | 5.0 --+-+-X --X O --4.75 A | X O A 2<-Feb 4.50 -X O X O X ----4.25 X O X 5 X 4.00 -X 4 X 8 +-----3.75 X 5 X | 3.50 -X 8 X --+-----3.25 X 1 X | 3.00 -C A X --+-----2.75 X 1 X | A 4 --+-----2.50 -+2.25 | C X | 2.00 -+-1 X --+-----1.75 | O | | 1.50 -+-+-+---+-----1.25 | | | |<-Year 1.00 -+-+-+---+-----0.75 | | | | 0.50 -+-+-+---+-----0.25 9 9 9 9 | 0 0.00 3 7 +-9 +-0 ---
You will notice that WMT for 1999 was trading above its BSL which you will remember as bullish.
Look at the RS chart for 1999 and you will see that in May (5) the RS reversed down, it was under performing the market, and stayed that way until October (A) when it reversed up. 61
Now look at the trend chart. Find the A for October in 1999 and you will see that the chart breaks a triple top and continues up. The RS indicated that WMT would out perform the market and we see on the trend chart that it did in fact do well.
Look at the RS chart for 2000 where in February (2) it has again reversed down. On the trend chart we see that WMT actually started to break down in January (1) of 2000. Now look at the trend chart. Find the 2 for February in 2000 and you will see that the chart breaks down again and violates its bullish support line.
Here are the calculations for the WMT RS.
You can immediately see that the RS chart does not move like the trend chart. It is much slower. Highlighted are the months as above. The trend chart a bove only lists part of 1999 to current. Date 03/14/2000 03/13/2000 03/10/2000 03/09/2000 03/08/2000 03/07/2000 03/06/2000 03/03/2000 03/02/2000 03/01/2000 02/29/2000 02/28/2000 02/25/2000 02/24/2000
Value 4.867 4.756 4.847 4.920 4.902 4.874 4.879 5.076 4.993 4.853 4.807 4.620 4.487 4.422
02/23/2000 4.633 <--The reversal down (*) 02/22/2000 02/18/2000 02/17/2000 02/16/2000 02/15/2000 02/14/2000 02/11/2000 02/10/2000 02/09/2000 02/08/2000 02/07/2000 02/04/2000 02/03/2000 02/02/2000 02/01/2000
4.694 4.672 4.672 5.006 5.301 5.502 5.420 5.396 5.386 5.407 5.060 5.136 5.300 5.305 5.315
Plotted as 4.75 because 4.672 is not enough for 4.50 which would be the next box down.
here is the DOW chart for some of 1999 and 2000. Compare this with the WMT RS chart. 62
7.5 7.0 6.5 6.0 5.5 5.0 4.75 4.50 4.25 4.00 3.75 3.50 3.25 3.00 2.75 2.50 2.25 2.00 1.75 1.50 1.25 1.00 0.75 0.50 0.25 0.00
| | | | -+-+-+---+---| | | | -+-+-+---X --| | | C O -+-+-X --X O -A | X O A 2<-* -X O X O X ---X O X 5 X -X 4 X 8 +----X 5 X | -X 8 X --+----X 1 X | -C A X --+----X 1 X | -+-A 4 --+----| C X | -+-1 X --+----| O | | -+-+-+---+----| | | | -+-+-+---+----| | | | -+-+-+---+----9 9 9 9 | 0 3 7 +-9 +-0 ---
In order for WMT to reverse up on its chart it would have to move as high as 6.00. Looking at the calculations on the left you will see that WMT is improving but not enough for a reversal up. If the market continues to wan while WMT strengthens we could see a reversal up in the RS.
7.5 7.0 6.5 6.0 5.5 5.0 4.75 4.50 4.25 4.00 3.75 3.50 3.25 3.00 2.75 2.50 2.25 2.00 1.75 1.50 1.25 1.00 0.75 0.50 0.25 0.00
| | | | -+-+-+---+-----| | | | -+-+-+---X ----| | | C O -+-+-X --X O --A | X O A 2<-* -X O X O X ----X O X 5 X -X 4 X 8 +-----X 5 X | -X 8 X --+-----X 1 X | -C A X --+-----X 1 X | -+-A 4 --+-----| C X | -+-1 X --+-----| O | | -+-+-+---+-----| | | | -+-+-+---+-----| | | | -+-+-+---+-----9 9 9 9 | 0 3 7 +-9 +-0 ---
WMT outperformed the Dow from October (A) until February (2). If WMT is under performing a chart that is breaking down this is bad news for the stock. Look back up to the WMT trend chart and you will see that it continued to break down through March. You can see on the chart the Dow started to break down in February .
63
Welcome:
Lesson 3: Part 2 - Examples
Let's walk through a trend chart and its RS chart over the course of a year. Trend Chart
RS Chart 5.5 5.0 4.75 4.50 4.25 4.00 3.75 3.50 3.25 3.00 2.75 2.50
| A ---8
----7 6
----X C ----X 6 ----3 C ----7
The RS and trend chart mirror each other in that they each were moving up. The market at the same time had been moving down.
6.5 6.0 5.5 5.0 4.75 4.50 4.25 4.00 3.75 3.50 3.25 3.00 2.75 2.50
| | ----+-+| | ----A +8 O ----7 O 6 O ----X B <--November C O ----X C 6 O ----3 O C O ----7 +-
Here the RS shows that for what ever reason this stock was not keeping up with the improving Dow. The poor trend chart was confirmed by the RS chart.
In November, the RS reverses down and the trend chart shows a noticeable difference as it starts to break down. The market during this time was starting to improve and had given a couple of buy signals.
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6.5 6.0 5.5 5.0 4.75 4.50 4.25 4.00 3.75 3.50 3.25 3.00 2.75 2.50
| | ----+-+| | ----A +8 O ----7 O 6 O ----X B <--November C O ----X C <--December 6 O ----3 O C O ----7 +-
The RS had reversed down in November (B) telling us that the stock was to under perform the market. Look what the trend chart did in December (C). It collapsed - by the way, do you know what pattern that is? The market during this time from November to December had climbed from 10,600 to 11,400 - improving considerably. The RS for this stock showed that it was not keeping up with the accelerated rate of the Dow
6.5 6.0 5.5 5.0 4.75 4.50 4.25 4.00 3.75 3.50 3.25 3.00 2.75 2.50
| | ----+-+-----| | ----A +----8 O ----7 O X -6 O X ----X B 3 -C O X ----X C 2 -6 O X ----3 O X -C O ----7 +---
The trend chart bottomed and turned around nicely giving some buy signals in January. The market at this time started to wain. It dropped from 11,400 to 10,600. However, this stock continued up as did its RS into March while the market continued dow n to 9,750.
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RS Chart Example with Calculations
RS Calculations February and March
6.5 6.0 5.5 5.0 4.75 4.50 4.25 4.00 3.75 3.50 3.25 3.00 2.75 2.50
Date Value 03/14/2000 4.517
| | ----+-+---------| | ----A +------------8 O ----7 O X <--Top X. 6 O X ----X B 3 <--Plotted. C O X ----X C 2 ---------6 O X ----3 O X ---------C O ----7 +--------------
In order for another X to be added to this RS chart the figures would have to reach 4.75. The stock performed very well from 3/7/00 to 3/14/00 with the chart actually rising from 3.75 to 4.50.
03/13/2000 03/10/2000 03/09/2000 03/08/2000 03/07/2000 03/06/2000 03/03/2000 03/02/2000 03/01/2000 02/29/2000 02/28/2000 02/25/2000 02/24/2000 02/23/2000 02/22/2000 02/18/2000 02/17/2000 02/16/2000 02/15/2000 02/14/2000 02/11/2000 02/10/2000 02/09/2000 02/08/2000 02/07/2000 02/04/2000 02/03/2000 02/02/2000 02/01/2000
<--X's
are added
4.624 4.734 4.458 4.210 3.981 4.001 3.919 3.677 3.811 3.764 3.904 3.955 3.592 3.661 3.688 3.676 3.775 3.610 3.557 3.701 3.765 3.817 3.838 3.725 3.588 3.654 3.711 3.681 3.770
Stocks with positive relative strength have a tendency to out perform those with negative relative strength. When making new stock commitments, try to find stocks with relative strength charts that have turned positive within the past six months to a year. This helps ensure you have a stock with lots of life left. Stocks whose relative strength has been positive for a long time might be close to turning negative. This is why it is important to evaluate the relative strength chart itself rather than simply accepting a positive or negative reading generated by a computer. Investing is still an art, not a science.
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In this example, you can see that if we had waited until the relative strength chart actually declined enough to exceed a previous bottom and give a sell signal, it would have been too late as we would have missed to much of the move. The reciprocal is true as well. If a chart is so negative that its RS chart shows a very long tail of O's down we would call the first threebox reversal back up the chart as turning positive. Otherwise, by waiting for the buy signal we would miss out on too much of a move.
Some stocks are so strong that their relative strength charts go strait up in a long column of X's. For the stock to turn from positive to negative relative strength, the chart would h ave to give a double bottom break. When the relative strength chart has a long column of X's up, the underlying stock would have to absolutely collapse to turn the relative strength chart negative by exceeding its previous bottom. In this case, we will pay very close attention to the first three-box reversal in the RS chart. In fact we would consider it negative until the RS reverses back up. In the case of long columns we act without an actual signal. It simply makes common sense. Human nature causes us to hang on to any thread of hope that the stock we bought was the right one. Once all the technicals break down, we tend to look to the fundamentals to bail us out. It has happened all too often. Even if you feel a stock is now a "good value" - don't hold your breath. A stock can stay a "good value" by not moving or, worse, drop another 10 points. Rather than take a loss, most investors will hold on for the long term in the expectation the stock will come back. This mentality enables the investor to maintain a portfolio of losers by ignoring the losers and taking profits in the winners. Let profits run not losses. Let's say you bought a stock at $30 in the software sector. Over time, the stock declines to $24 and the relative strength chart turns negative. Ra ther than sitting with the stock and wishing it back up, why not find another stock around the same price in the same industry that has recently turned positive on its relative strength chart and is both fundamentally and technically sound? Sell the bad one and buy the good one. You have a much better chance of getting your money back with the good stock. Always re evaluate your stocks whenever there is a change in direction in the RS chart.
As with all the lessons reading Tom's book along side will add some valuable information.
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Welcome:
Lesson 3:Wrap Up
Relative strength is a calculation used for all stocks and indexes. One of the most important aspects of analyzing a chart is to know how it compares to the performance of the market. Naturally, you want to outperform the market and continually improve your chances at doing so. The RS calculations have proven successful towards this goal. Even sectors must out perform or under perform the market at some point. Stacking odds in your favor; if the marke t is bullish, the sector you are invested in is out performing the bullish market and the stock you are invested in is out performing the sector that is out performing the market.... that is stacking the odds in your favor. We will cover Sector Relative Strength in Lesson 5. Lesson 3 Contents:
Part 1: Relative Strength
Evaluating Potential Scenarios Formula
Part 2: Coca-Cola Example Wal-Mart Example Various Examples
We will now test you to find your comprehension of the subjects discussed in Lesson 3
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Testing for Lesson 3: Relative Strength. 1-3) Complete the formula for the Relative Strength reading by selecting the correct entry for each of the fields. -Select One-
(
/
- Select One -
)(
- Select One -
) = RS Reading
4-7) Answer the following with yes or no.
a. An RS on a "buy" signal can be in a column of O's
yes
no
b. Positive relative strength means the stock only goes up
yes
no
yes
no
yes
no
c. An RS on a buy signal and in a column of X's is the strongest reading for an RS chart d. RS on a sell signal in a column of O's is a great stock to mortgage your house, take a personal loan, max your credit cards to put your whole life savings into
8-11) Calculate the RS reading for each of the following: (Numbers rounded to the third decimal.)
Dow Jones: 10200 Stock Price: 90
Dow Jones: 10500 Stock Price: 102 RS Reading:
- Select One -
Dow Jones: 11000 Stock Price: 30 RS Reading:
RS Reading:
- Select One -
Dow Jones: 10500 Stock Price: 29
- Select One -
RS Reading:
- Select One -
12-19) Determine the RS risk for the following stocks:
Stock
#1
Relative Strength Chart
Trend Chart
2.75 2.50 2.25 2.00 1.75 1.50 1.25 1.00
25 ------------------- --24 X 23 X X O 22 X X O X O 21 X O X O X O 20 -X ------X O X O X -----Med 19.5 X O X X O X O 7 19.0 X O X O X O --O X ---18.5 X O X O X O X * 18.0 X O --O ------O * ----
O O O O A
X X 1 X X
O O 3 5 7 9 3
----------X 2 O ------1 O X 5 ------X -----------
Evaluate the RS chart. Choose one
Given the RS information only, would you buy this stock here?
Choose one
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Stock
# 2
3.75 2 | | 3.50 --X O --+-------3.25 X O 7 | 3.00 -A 6 X O 7 ----2.75 | 9 X O X 2.50 --+-3 --C X ----2.25 | | 1 2.00 --+-+---+-------1.75
34 33 32 31 30 29 28 27 26 25 24 23
* --* 4 X X X X O X X O 3 --O X O X O *
--X O X O X O --* *
X X O X X O X --7 O X -O X O * Med O X * 5 * * ---------Bot
Given the RS information only, would you buy this stock here?
Evaluate the RS chart.
Choose one
Choose one
Stock
#3
3.00 2.75 2.50 2.25 2.00 1.75 1.50 1.25 1.00
--| 8 ---7 6 ---4 X ---X 7 ---|
| | O O 9 A O O O
--| | 7 | 6 O 4 O 1 8 X | X | --|
-----X 6 -X X ------------
31 X 30---------X O 29 X X O 28 X O X O 27 X O X O 26 6 O O 25 O X ----O 24 O X O 23 O X 22 O
X ----X X X X X X O X X O X 7
O --O O Med O
---*
*
Given the RS information o nly, would you buy this stock here?
Evaluate the RS chart.
Choose one
Choose one
Stock
#4
2.50 2.25 2.00 1.75 1.50 1.25 1.00 0.75
----| | ----X B ----X X ----5 X
| | | O O O 2 |
Evaluate the RS chart.
Choose one
| X X C X X | |
| | O O 3 B | |
3 X 2 X X
--O O 5 ---
-----
28 27 26 25 ---------6 24 * X 23 * X 22 X * X 21 X O * X 20 X O --* X 19.5 X O X X 19.0 X O X O X 18.5 O X O X
Given the RS information only, would you buy this stock here?
Choose one
Score Test
70
X X O X O --X O X O 7 O X Med O X O X O X O O X O X ----O X O ----* *
Welcome:
Lesson 4: Introduction
Now we will talk about the market. The PnF indicators are our main tools for assessing risk in the market place. In this chapter all of the different indicators will be reviewed. In this section you will get answers to many investment questions. How does one determine when risk is high or low? When do I lock in some profits? What are some strategies for managing risk? Can the market be timed? Is there a way to know? You will be able to assess the risk in the market and how best to take advantage or protect yourself accordingly. Lesson 4 Contents: Part 1: NYSE Bullish Percent Market Timing Attributes of a Bullish Percent Chart NYSE Bullish Percent Risk Levels. Historical NYSE BP Chart
In this section we will list any upcoming live online classes specifically covering this chapter.
Message Board
Part 2: Bullish Percent Charts
OTC Bullish Percent Optionable Bullish Percent 10 Week Moving Average High Low Index Dow Jones 20 Bond Average
Test yourself at the end of the chapter to sharpen your skills. If you have any questions, please check the "Questions" section to see if it has already been answered. If it has not, then click on the question mark icon below to email us your question. It will be answered shortly (within two business days).
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Welcome:
Lesson 4: Part 1. NYSE Bullish Percent Technical Indicators
The Myth About Market Timing. You have heard for years that market timing can't be done. The market averages a return of about 12% a year and to try and do better is just a frugal attempt. The buy and hold strategy is the best for long term investors. There's more to it than just buy and hold as we will explain and you 've probably come to realize on your own.
Best Days vs Worst Days. Consider the following argument put forward by the Buy and Hold proponents. If you missed the ten best days in the market from '90 -'98, your returns would be 140% versus a buy and hold strategy of 248%. The other half of that story is if you missed the ten worst days during that same period, your returns were 473%. Since the best days and the worst days often happen near one another, we looked at missing the 10 best and 10 worst days. Excluding those days your return was 261%! Market Timing Does Work.
"In order to be a successful risk management investment strategy, market timing does not have to be perfect. Despite belief to the contrary, market timing does not target getting in and out of the market at the absolute bottoms or tops. It does, however, strive to get an investor's funds out of the market before a major bear market devastates the portfolio. Market timing's first and foremost priority is the preservation of capital." Source: "Lasting Wealth is a Matter of Timing" by Sosnowy
Do You Feel Lucky? The assumption of the often quoted Buy and Hold studies is that you won't need your money for 50 years or more. These studies assume you aren't buying a home, sending children to college or retiring in the next 50 years. A more important question is... "Where are you getting on the investment train?" If you got on the train at the beginning of the 1973 -1974 Bear Market, it took 7.6 years to get back to even. Do you have 7.6 years to spare? Do you not need your money for 7.6 years?
NYSE Bullish Percent: We use the Bullish Percent indices to assess risk in the market.
The concept began in the 1940's but it wasn't until 1955 that A.W. Cohen actually created the NYSE Bullish Percent. We often refer to this indicator as our main coach for NYSE stocks. It tells us whether to have the offensive or defensive team on the field. X's mean offense and O's mean defense. This indicator tells you who has the ball. Based on a University of Chicago study 80% of the risk in any stock is based in the market and the sector. However, they found that most people spent 80% of their time on stock selection. The NYSE Bullish Percent provides the insight needed in determining the risk in the market. The more you learn about this indicator, the more confidence you will have in your day to day operations in the market. If the overall market is not supporting higher prices, very few stocks you own , if any, will do well. In a football game, two sides operate on the fi eld at any one time, offense and defense. The same forces act in the marketplace. There are times when the market is supporting higher prices. When the market is supporting higher prices, we can say that you have possession of the ball. You have the offens ive team on the field. When you have the ball, your job is to take as much money away from the market as possible; this is the time you must try to score. During times when the market is not supporting higher prices, you have in essence lost the ball and must put the defensive team on the field. During such
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periods, the job of the market is to take as much money away from you as possible. Think for a moment about your favorite football team. How would they do if they operated only with the offensive team in every game? They might do well when they had possession of the ball, but when the opposing team had the ball, your team would be scored on at will. The net result is your season would be lackluster at best. This is the problem most investors have: They don't know which team is on the field, much less where the game is being played. The NYSE Bullish Percent clearly signals when the environment is ripe for offense or defense. The NYSE BP is simply a compilation of the percent of stocks that trade on the NYSE on Point and Figure buy signals. If you simply thumbed through all the Point and Figure chart patterns of the stocks on the NYSE and counted the ones that were on buy signals, then divided by the total number of stocks evaluated, you would have the NYSE Bullish Percent reading. DWA calculates all of this in their database and displays the charts for you, however, it is important to know how they are calculated. Let's say for instance, there were 2,000 stocks on the NYSE and 1,000 of them were on Point and Figure buy signals. The Bullish Percent would be at 50% (1,000/2,000 = 50 percent). We use the same three box reversal to shift columns in this index as we do in the normal Point and Figure chart. Each box constitutes 2 percent, and the vertical axis runs from 0 to 100 percent. It will take a 6% change in order to reverse this chart. When the index is rising in a column of X's, more stocks are going on buy signals. Changes in the index can only come from first signals that are given by a stock, not subsequent signals. Let's say that XYZ stock bottoms out after declining and then gives that first buy signal off the bottom. That signal turns the stock from bearish to bullish. It is this first buy signal that is recorded. All subsequent buy signals are not counted. The Bullish Percent concept is unique from most market indicators because it is a one stock - one vote indicator. The reason this is so important is that most peoples portfolios are managed on an equal dollar weighted basis, much like a one stock - one vote. Therefore, the Bullish Percent index is a better indicator to manage risk than a capitalization weighted index like the S&P 500. In other words, you are getting an apples to apples comparison.
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Welcome:
Lesson 4: Part 1. Continued Attributes of a Bullish Percent Chart: These are the same as with any PnF chart. The letters or numbers in the columns denote the months of the year. Time spent in a column of X's or O's is generally a number of months, not weeks. There are no bullish or bearish resistance lines but there are risk levels which we will go over in a moment. It is important to know how this index works so let's go over how the index rises and falls.
Example: Let's say there are 100 stocks trading on the NYSE. Over the next week 12 sto cks experience a new buy signal and 10 stocks experience new sell signals. The net result of the action for the week is two new buy signals or 2 percent more stocks are on buy signals. Remember that each box on the chart represents 2 percent, so a 2 percen t net change in new buy signals allows the chart to rise one box. The only way to switch from one column to the next is through a three -box reversal. It would take a sum total of 6 percent net buy or sell signals to cause a reversal. Remember the box sizes , in this case the box size is 2 percent and therefore a three box is 6 percent, in either direction. Reversing from one column to the next is tantamount to losing or gaining possession of the ball. We use the football analogy here a lot because it helps visualize how the NYSE BP works. The "playing field" runs from 0 to 100 percent, kind of like a 100 yard football field. Where you are on that field determines your "field" position. The column you are in tells you if you have the footbal and the field position tells you how much room you have to run.
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There are two things we try to ascertain with this chart: 1 - Who has the ball? 2 - What is the field position?
The higher the index climbs, the more overbought it becomes. The lower it drops, the more oversold it gets. When the index is rising in a column of X's, we say you have possession of the football. When you have possession, you must run offense plays. This is your time to attempt to score against your opponent, the stock market. When the index is declining in a column of O's, we say the market has the ball and your job is to try to keep it from scoring against you. If you colored the chart above the 70 percent level red and the area below 30 percent level green, these would represent the two extremes much like the end zones of a football field. When you are in the Green Zone, below 30% and in a column of X'syou have a lot of room to run the ball. When you are in the Red Zone and in a column of O's you have a lot of territ ory to lose the ball. It isn't often the index moves below 30% or above 70%. Thinking about this concept in terms of supply and demand, when the NYSE Bullish Percent goes near/below 30% the availability of supply to continue to push the market lower is se verely limited. When the NYSE BP goes near/above the 70% level, the availability of demand to continue to push the market higher is severely limited.
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Welcome:
Lesson 4: Part 1. Continued NYSE Bullish Percent Risk Levels. There are six degrees of risk in bullish percent charts. These risk levels are similar to the different signals a traffic light can give. While we pay the most attention to whether the bullish percent index is in X's or O's and the field position, to become a real craftsman at this meth odology you need to be aware of the six different risk levels.
1 - Bull Confirmed 2 - Bull Alert 3 - Bull Correction 4 - Bear Confirmed 5 - Bear Alert 6 - Bear Correction. 1) Bull Confirmed Market: This risk level occurs when the Bullish Percent gives a buy signal by exceeding a previous column of X's.
It is equally important to evaluate the relative field position of the index. Bull Confirmed at the 70 percent level is very different from Bull Confirmed at the 30 percent level. Bull Confirmed at 70 percent means much more risk than Bull Confirmed at 30 percent.
2) Bull Alert Market Examples of Bull Alert: This market occurs when the Bullish Percent reverses up into a column of X's from below 30 percent. This index does not have to exceed the 30 percent level, simply reverse up. At the 30 percent or lower level, many stocks are making their lows. The actual reversal to the upside suggests most lows have been made and the p robability is up from there. A change to this risk level is tantamount to a red light changing to green.
3) Bull Correction Market
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The bull market is getting a little extended at these levels, and the market is currently digesting its excesses. The bull trend is likely to resume shortly. It is characterized by a 6 percent reversal down from a Bull Confirmed status that takes place below the 70 percent level. The next reversal back up into a column of X's reverts the risk level back to Bull Confirmed. Examples are below. First...
Then...
4) Bear Confirmed Market: This market is characterized by the Bullish Percent Index penetrating a previous bottom. Again, field position is important to consider in this risk level. Bear Confirmed at 30% is not as dangerous as Bear Confirmed at 70 percent. Always keep the field position in mind. The traffic light is red in this risk level. If Bear Confirmed comes near 70% you should employ defensive strategies. If the Bear Confirmed happens near 30%, watch closely for the first three box reversal back up to X's. See example to the right. 5) Bear Alert Market When the Bullish Percent drops below 70 percent without penetrating a previous bottom Bear Alert status occurs. Typically a reversal to Bear Alert will bring this NYSE BP down to at least the 50% level. In the Bear Alert market, defensive action should be taken. Short positions can also be initiated in technically weak stocks. An example is to the right.
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6) Bear Correction Market. This indicates a respite in the selling pressure. This phase is characterized by a 6 percent reversal into a column of X's from a Bear Confirmed status above the 30 percent level.
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Welcome:
Lesson 4: Part 1. Continued Risk Levels labeled in the NYSE Bullish Percent.
Link to a historical Point and Figure Chart (database format)
We've talked a lot about using the NYSE Bullish Percent as a way to assess risk in the market. Here are just some of the different ways one can play offense (wealth accumulation) and defense (wealth preservation). Offense:
Defense:
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Buy Stock Come off margin Buy Calls Sell partial positions Increase invested position. Tighten up stop loss points. Sell calls against positions Take partial positions off the table Increase cash position Move to more defensive issues Buy protective puts Short positions can be initiated
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Welcome:
Lesson 4: Part 2. Bullish Percent Charts OTC Bullish Percent Many investors make Chart of the OTC Bullish Percent with risk the mistake of trying levels: to follow too many indicators. The more you follow, the more confused you will become. Our most important concept is the Bullish Percent discussed in the first part of this Lesson. DWA also follows an OTC Bullish Percent Index because of the plethora of high -tech, over-the-counter stocks we deal with each day.
The OTC Bullish Percent Index is a compilation of the percentage of over the-counter stocks that are on Point and Figure buy signals. The chart is read the same way as the NYSE Bullish Percent Index. When the index is rising in a column of X's, you have the football. Conversely, when it is in a column of O's, the OTC market has the ball. The same two lines of demarcation exist at the 70% and 30% level. The risk levels are defined the same for the OTC BP as with the NYSE BP and their meaning is identical. Important Note: You can see here with the above chart that it isn't often the Index reaches below the 30% level except in extreme market conditions. It is more often that it bases around the higher 30's or lower 40's. This is also true near the 70% level. Most often the OTC Bullish Percent tops out in the 60's. When learning the risk levels you must understand, as with all of PnF charts, that this is an art, not a science. Point and Figure is a combination of charts and so far we have been teaching you the principles of the individual charts and we will start to move into how to put them all together.
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Optionable Bullish Percent The Optionable Bullish Percent is a shorter to intermediate term indicator comprised of bigger name/cap stocks in the NYSE and OTC that have options listed against them. There are more than 3000 stocks in this index.
It works just like the NYSE BP and often changes in the Optionable Bullish Percent will be followed by a change in the NYSE Bullish Percent. That is to say if the "OPTI" turns negative we watch the NYSE BP closely to see if it is to turn negative and vice versa. The same six risk levels apply and the overbought level begins at 70% (Red Zone) and the oversold level begins at 30% (Green Zone).
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Welcome:
Lesson 4: Part 2. Bullish Percent Charts OTC Bullish Percent Many investors make Chart of the OTC Bullish Percent with risk levels: the mistake of trying to follow too many indicators. The more you follow, the more confused you will become. Our most important concept is the Bullish Percent discussed in the first part of this Lesson. DWA also follows an OTC Bullish Percent Index because of the plethora of high -tech, over-the-counter stocks we deal with each day.
The OTC Bullish Percent Index is a compilation of the percentage of over the-counter stocks that are on Point and Figure buy signals. The chart is read the same way as the NYSE Bullish Percent Index. When the index is rising in a column of X's, you have the football. Conversely, when it is in a column of O's, the OTC market has the ball. The same two lines of demarcation exist at the 70% and 30% level. The risk levels are defined the same for the OTC BP as with the NYSE BP and their meaning is identical.
Important Note: You can see here with the above chart that it isn't often the Index reaches below the 30% level except in
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extreme market conditions. It is more often that it bases around the higher 30's or lower 40's. This is also true near the 70% level. Most often the OTC Bullish Percent to ps out in the 60's. When learning the risk levels you must understand, understand, as with all of PnF charts, that this is an art, not a science. Point and Figure is a combination of charts and so far we have been teaching you the principles of the individual charts a nd we will start to move into how to put them all together. Optionable Bullish Percent The Optionable Bullish Percent is a shorter to intermediate term indicator comprised of bigger name/cap stocks in the NYSE and OTC that have options listed against them. There are more than 3000 stocks in this index.
It works just like the NYSE BP and often changes in the Optionable Bullish Percent will be followed by a change in the NYSE Bullish Percent. That is to say if the "OPTI" turns negative we watch the NYSE BP closely to see if it is to turn negative and vice versa. The same six risk levels apply and the overbought level begins at 70% (Red Zone) and the oversold level begins at 30% (Green Zone).
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Welcome:
Lesson 4: Part 2. Continued
10 Week Moving Average Also known as the Percent of 10.
One of our main short term indicators. As the name implies, this is simply the percent of stocks on the NYSE that are above their ten week moving averages. We also have a 10 Week for the OTC. Buy signals occur when a column of O's fall at or below 30% and then reverse to a column of X's. Buy signals can also occur when a column of X's exceeds a previous column of X's. Sell signals occur when the index goes above 70% and then reverses down below 70% or when a column of O's exceeds a previous column of O's. Being aware of the short term picture is important because often it will spill over into the long term picture.
We use this short term indicator with the HighLow index and we like to see them moving in concert with one another. The 10 Week moves a lot quicker than the NYSE BP, the OTC or the Optionable BP because it is a short term indicator. This index is of great benefit when you are planning your trade. Investors should never us the 10 Week Moving Average Index as their sole indicator in determining whether to make new stock commitments. commitments. However, traders can effectively use it as a market timing indicator for short term trades. If the main trend in the market is up as dictated by the NYSE BP and the 10 Week is on a buy signal, then you are in a market that is bull configured both short and long term. In the latter case, an investor would be fully invested. We will continue with how to put this together with other indexes in a later lesson.
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High Low Index
One of the short term indicators, we use this in conjunction with the Percent of 10. This index is calculated by taking the number of new highs and dividing by the number of new highs plus new lows. We keep this calculation on a ten day moving average and then plot it on a point and figure chart. Buy signals come when the index falls to or below 30% and then reverses up, or a column of X's exceeds a previous column of X's. Sell signals come when the index goes above 70% and then reverses down below 70% or a column of O's exceeds a previous column of O's,
The chart is set just like a bullish percent chart going from 0 to 100%. The two critical levels are 30 and 70%. Sell signals come from reversals above to below 70%. Buy and sell signals can also come by exceeding a previous top or bottom respectively. Reversals from above 70 percent suggest that there is a trend change from more stocks making new highs to more stocks making new lows. The percent of 10 and the High Low typically go in tandem but not always. Sometimes one lags the other. Nothing is ever exact in the markets. These two indicators are our main short term guides.
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More on the NYSE High Low Index ) ( Excerpt from 10/01/99 Daily Equity Report Below is a table showing times when the NYSE High Low Index hit 10% and the subsequent reversal up. As you can see, reversals up from below the 10% level have been very good signs to re -enter the market with new positions. Date Mar 1980 Sep 1981 Jun 1982 Feb 1984 May 1984 Jul 1984 Oct 1987 Jan 1990 May 1990 Aug 1990 Nov 1994 Aug 1998
Moved Below 10% 3-6-80 8-31-81 6-7-82 2-17-84 2-17-84 7-18-84 10-20-87 1-31-90 5-2-90 8-15-90 11-23-94 8-31-98
Dow Reading 828.07 881.46 804.03 1148.87 1101.24 1111.64 1841.01 2590.54 2689.64 2748.27 3674.63 7539.07
Low Reading 0.9% 2.0% 5.5% 7.5% 5.3% 5.5% 0.7% 8.9% 9.7% 3.4% 5.4% 4.2%
Dow Reading 800.94 849.98 795.57 1134.21 1124.35 1096.95 1938.33 2590.54 2689.64 2613.37 3746.29 7615.54
Upside Reversal 4-10-80 10-7-81 6-24-82 2-28- 84 6-11-84 8-2-84 1-4-88 2-7-90 5-7-90 9-18-90 12-21-94 9-23-98
Dow Reading 791.47 868.72 810.41 1157.14 1115.61 1166.08 2015.25 2640.09 2721.62 2571.29 3801.80 8154.41
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Welcome: Lesson 4: Part 2. Continued
Dow Jones 20 Bond Average: This is our primary bond indicator. The Dow Jones 20 Bond Average is comprised of 10 industrial and 10 public utility bonds traded on the New York Exchange. The closing price of the Dow Jones 20 Bond Average is simply plotted on a Point and Figure chart. The box size is .20 per box. The average moves slowly and does not often give signals, but when they occur, you must pay close attention.
Moves on this chart are typically long term and we look at buy and sell signals as well as high pole and low pole warnings. In October 1993 and in February of 1999, the Dow Jones 20 Bond Average gave a sell signal at high levels which suggested higher interest rates to come. This in both cases this indicator was dead on the money. We reported in our Daily Equity Market Report to lock in interest rates on adjustable mortgages. The rules for a High Pole and Low Pole warning apply here. A low pole warning occurs when the chart exceeds the previous bottom by at least three O's and then reverses back to the upside and retraces the previous down move by greater than 50%. This is considered a buy signal. The high pole warning occurs when the chart exceeds the previous top by at least three X's and then pulls back retracing more that 50% of the upmove. This is a sell si gnal.
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Buy and Sell Signals for the Dow Jones 20 Bond Average:
May 1992: October 1993: October 1993: January 1995: January 1995 July 1995: July 1995: September 1995: September 1995: March 1996: March 1996: August 1996: August 1996: January 1997: January 1997: June 1997: June 1997: February 1999 February 1999: February 2000 February 2000 March 2000 March 2000 June 2000
Buy Signal Sell Signal Sell Signal Buy Signal Buy Signal Sell Signal Sell Signal Buy Signal Buy Signal Sell Signal Sell Signal Buy Signal Buy Signal Sell Signal Sell Signal Buy Signal Buy Signal Sell Signal Sell Signal Buy Signal Buy Signal Sell Signal Sell Signal Buy Signal
99.2 105.6 105.6 94.6 94.6 102.8 102.8 103.0 103.0 103.8 103.8 102.0 102.0 103.0 103.0 102.6 102.6 106.0 106.0 96.4 96.4 95.6 95.6 94.6
Change:
+6.4 Change:
+11.0 Change:
+8.2 Change:
-0.2 Change:
+0.8 Change:
+1.8 Change:
+1.0 Change:
+0.4 Change:
+3.5 Change:
+9.6 Change:
-.8.0 Change:
+ 1.0
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Welcome:
Lesson 4:Wrap Up
In this chapter you have been introduced with all of the main indicators; the NYSE BP, the Optionable BP, the OTC BP, Percent of 10, High Low Index and the Dow Jones 20 Bond average. The NYSE BP and OTC BP are our Main Coachs, our guide to whether we are offensive or defensive in the mark et. They look ahead and are the first thing we consider when investing. The short term indicators determine our trade positioning, whether to cover or initiate new positions.
In a later chapter you will see how all of these work together to determine long term and short term risk and how to position yourself in these different types of markets. Lesson 4 Contents: Part 1: NYSE Bullish Percent
Market Timing Attributes of a Bullish Percent Chart NYSE Bullish Percent Risk Levels. Historical NYSE BP Chart
Part 2: Bullish Percent Charts
OTC Bullish Percent Optionable Bullish Percent 10 Week Moving Average High Low Index Dow Jones 20 Bond Average
We will now test you to find your comprehension of the subjects discussed in Lesson 4.
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Testing for Lesson 4: Technical Indicators. 1) Which indicators are Short term or Long term?
a. OTC Bullish Percent
Long Term
Short Term
b. Optionable Bullish Percent
Long Term
Short Term
c. NYSE Bullish Percent
Long Term
Short Term
d. 10 Week Moving Average
Long Term
Short Term
2) Which indicator is not a percentage?
NYSE BP
10 Week M.A Dow Jones Bond Average High-Low Index
Optionable BP.
3) Answer the following yes-no questions.
a. If a stock continues to move down after it has given a sell signal does that affect the NYSE BP?
yes
no
b. If a stocks RS gives a new sell signal does that count as one vote towards the NYSE BP?
yes
no
c. The 10 Week moving average is much more sensitive than the Optionable BP
yes
no
d. The Red Zone begins at the 60% level
yes
no
e. The NYSE BP is considered over bought above the 50% level
yes
no
f. It isn't often the NYSE BP moves below 30% or above 70%
yes
no
g. One type of buy signal occurs when a column of O's fall at or below 30% and then reverse to a column of X's.
yes
no
4) The two lines of demarcation are:
30%-70%
40%-60%
20%-80%
25%-75%
10%-90%
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5) Match the following:
30% 50% 60%
a - There is a lot more upside than down side. Open field. b - More stocks on PnF buy signals but the field position isn't good. c - I don't like football. d - Most people are already in that want to buy, risk level is high. e- Middle of the field and considered good position.
70% 6) What is the percent change needed to reverse columns on the Bullish Percent charts?
3% Changes with the field position 6% Depends on the box scale.
Risk Levels: 7) Match the Risk levels with the description and chart.
Bull Confirmed Market
Bear Confirmed Market
Bull Alert Market
Bear Alert Market
Bull Correction Market
Bear Correction Market
1 This market is characterized by the Bullish Percent Index penetrating a previous bottom. 2 This market occurs when the Bullish Percent reverses up into a column of X's from below 30% level. 3 When the Bullish Percent drops below 70% without penetrating a p revious bottom 4 When the Bullish Percent gives a buy signal by exceeding a previous column of X's. 5 It is characterized by a 6 % reversal down from a Bull Confirmed status that takes place below the 70% level. 6 This phase is characterized by a 6% rev ersal into a column of X's from above the 30 % level from a Bear Confirmed status.
Score Test
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Welcome:
Lesson 5: Introduction
We've covered the overall market with the Bullish Percents and now we look at the individual sectors that are comprised of the securities. As with the market, it is important to understand all of the risk under which a particular stock is operating. Here we discuss how the sectors operate, how to evaluate them and how they are performing com pared to the market. Lesson 5 Contents: Part 1: Sector Bullish Percents.
In this section we will list any upcoming live online classes specifically covering this chapter.
Message Board
Part 2: Sector Relative Strength
Perfect Market Timing vs Perfect Sector Timing DWA Individual Sectors. Sector Bell Curves Examples
Sector Relative Strength Intel Example Sector (Index) RS Chart DWA Sector Index RS Charts
Test yourself at the end of the chapter to sharpen your skills. If you have any questions, please check the "Questions" section to see if it has already been answered. If it has not, then click on the question mark icon below to email us your question. It will be answered shortly (within two business days).
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Welcome:
Lesson 5: Part 1 - Sector Bullish Percents.
Perfect Market Timing vs Perfect Sector Timing. Buy & Hold:
Bought the S&P 500 and held through the good times and the bad times.
Market Timing:
Took money out of the S&P before there was a down month and put it back in just before a positive month.
Sector Timing:
Bought the best performing sector at the beginning of the year.
Sector analysis is one of the most important yet least analyzed parts of the market. We place tremendous emphasis on sector rotation in our daily work. Probably 80 percent of the risk in a stock is the market and sector. Stock prices do not move without rhyme or reason. These moves tend to be orchestrated.
Watch magazine covers carefully. The next time you are in the airport look at the magazine rack and see if you can find a widely read magazine that makes a major statement on its cover about some sector of the market - something like "The Banking Industry Is Dead". If you find one, buy the magazine and keep it. Normally, the trend in that sector will continue to move for a couple of months in the direction the A good analogy would be the picture of wildebeest cover describes. Give that sector 8 months, and you romping across the African plains, moving in unison will find its behavior is the exact opposite of that suggested on the magazine cover. The reason for first in one direction and then another, but the majority go together. Sectors operate the same way. this is that the cover stirs Mr. Jones and Ms. Smith into action and while all the Jones and Smiths are Wall Street tends to follow the herd. First one busy reacting, the sector moves in the forecasted analyst raises the earnings expectation, then the direction. Once these investors are in and the door rest follow and before you know it, the sector is in slams behind them, there is no more buying or play. selling pressure (whichever the cover suggests) left to sponsor the sector. The forces of supply and As the sector moves up, other institutions see the demand begin to change, and the sector takes the move and climb on board. Eventually the opposite track. mainstream financial periodicals catch wind of a major move underway and begin to write articles about how the industry has made a turnaround and You must remember, to be successful in the stock market you must look ahead: What is happening in should have clear sailing ahead. This draws investors in just in time to catch the top. By the time the market today has already been discounted many months ago. When evaluating sectors you the articles appear in magazines about how great the industry is, almost everyone is in that wants to must be a contrarian. You must find the courage to buy stocks in sectors that are out of favor. You must be in. The last group is the unsuspecting public, avoid the crowd, go the opposite direction. This is who use newspapers and magazines as their extremely difficult as it goes against human nature. primary source of stock market research.
Remember that prices move as a direct result of supply -and-demand imbalances. If there are no more buyers left to cast their vote, supply by definition must take the upper hand. The sector then begins to lose Sponsorship, and the whole process begins again only in reverse this time.
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Sector rotation is one of the most important parts of our daily operation. We follow 43 sector Bullish Percent Charts. The same principles used with the market bullish percent charts applies to the Sector Bullish percents. The same 30% and 70% levels apply to sectors as well as the six different risk levels. Ideally, each sector bullish percent should have at least 100 stocks in it. You will also notice that some sectors tend to move to greater extremes than the NYSE Bullish Percent.
Individual sectors. Here are the sectors currently covered at DWA: This list is pulled from the DWA database.
Aerospace Airline Asia Pacific Autos & Parts Banks Biomedics/Genetics Building Business Products Chemicals Computers Drugs Electronics Europe Finance Foods Beverages/Soap
Forest Prods/Paper Gaming Healthcare Household Goods Insurance Internet Latin America Leisure Machinery and Tools Metals Non Ferrous Oil Oil Service Precious Metals Protection Safety Eq Real Estate
Restaurants Retailing Savings & Loans Semiconductors Software Steel/Iron Telephone Textiles / Apparel Transports / Non Air Bull Alert Utilities / Electri Utilities / Gas Wall Street Waste Management
We will not review each sector bullish percent chart one by one, however, it is important that you take the time to look at them. By evaluating each of these charts you will learn the nuances of each sector. Again this is the "art" of the methodology. Some like the internet have wild swings to chart extremes while others like the drug sector seem to move in a more confined area. Understanding this, knowing where a sector typically tops or bottoms, helps you to better evaluate the risk in a particular sector.
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Welcome:
Lesson 5: Part 1 - Continued
Sector Bell Curves:
The tables below are used to help us depict the overbought or oversold nature of the sector bullish percent charts. The horizontal scale runs from less than 10%(oversold) to greater than 90% (overbought). We simply place the sector symbol above the point on the horizontal scale which correlates to its bullish percent chart. If a sector is on the far right side it is overbought and if it is on the far left side it is oversold. Below are some "time shots" of these curves. Dow Industrials in the 2350 area and making all -time highs
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It is when the Bell curve is skewed to the right that everyone who wants to be in the market is in and there isn't much opportunity left. This is when things look the best but really it is when caution is warranted. The charts above show all the sectors in Uppercase letters. DWA created this method to easily show which sectors are moving up or down, are in X's or O's; Uppercase for those sectors moving up and Lowercase for sectors moving down (not shown in the Bell curves above). You can look up the sector Bell Curve if you have the professional subscription at DWA under the "Reports and Sector Area" link. For the individual investors, DWA posts the Sector Bell curve in the "From the Analyst" section when there are important changes or updates.
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Welcome:
Lesson 5: Part 1 - Continued
Let's look at a few charts to give the example. Internet Sector (BPINET)
Notice the large swings in this sector from above 80% to below 20%. This particular sector covers the whole field. This action is not typical of the sector bullish percents. This is why it is imparative that you evaluate and "get a feel" for each of these charts. Or at least the ones you are interested in.
Note: With respect to the Bell Curve, this sector would be listed on the left hand side, below the 30% level and in lower case (because the sector chart is in O's).
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Drug Sector (BPDRUG)
Notice this sector typically moves between the high 30's and mid 60's. It has in its history moved below 30%, which proved to be a great entry. Only in the years '91 and '92 did it move above 70% (not pictured). Therefore, we consider the "over bought" area for this particular sector to be in the 60's and the low 30's woul d be considered the "over sold" area.
Note: With respect to the Bell Curve, this chart would be in the middle of the curve, at 50%, and in Uppercase letters because the chart is in X's.
Take time to look at the different sectors to see where they top and bottom out and where o pportunity lies. At this writing, the market has taken a major slide and the Sector Bell Curve has been effected. Most of the sectors are below the 50% area telling us that the market is now over sold. We look for sectors to reverse up from these low level s and to find opportunity in stocks that are housed in those sectors. You will see the Uppercase and Lowercase letters in this example.
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Welcome:
Lesson 5: Part 2 - Sector Relative Strength
Sector Relative Strength is a great tool to use when trying to determine which sectors are outperforming the market. Given the fact that the Sector is one of the greatest contributors to price fluctuation in a stock, it is extremely important to determine its relative strength. Those sectors exhibiting positive relative strength (ones in a column of X's on their RS chart) are the ones to focus on.
Relative Strength is a term we use extensively and place great importance. Many of you are very aware of its definition and importance pertai ning to stock selection, but sector relative strength is a vital component when determining which sectors are likely to perform the best. During times of market uncertainty, Sector RS takes on a particularly significant role. It is at these times that you should be paying close attention to those sectors which are exhibiting strong relative strength - that is, are showing that they are "out performing" the market. Sector Relative Strength measures how a particular sector is doing compared to the market in general. The Relative Strength calculation is simply done (using Tuesday evening closing data that is available automatically through DWA) by dividing the price of the sector by the price of the S&P 500 (SPX), and then multiplying by 100.
This number is then plotted on a point and figure chart. As with any PnF chart and as you have seen in the previous lesson on stock relative strength, 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. But of equal importance for Sector RS is what the most recent column is on the RS chart. When a sector index reverses up into a column of X's on its RS chart, we consider that a "Buy" signal.
When a reversal up occurs, it is a sign that you should be considering it to initiate positions. Don't forget that there are other factors to consider such as risk i n the general market and the chart of the individual stock. A reversal down on the sector RS chart is considered a negative and this would not be a sector to consider intiating positions in. If long stocks in these sectors it is time to evaluate them and make sure that appropriate stop loss points are in place. The Nuances of Navigating this market. Using the sector RS.
At DWA we constantly strive to present you with quality advice and research. We are always working to become better at using our time-tested market and sector indicators, and are continuously striving to develop new tools to help us navigate the market, and therefore advise you accordingly. But just as important as our development, is your development with using the tools we give you. This is where education comes into play. We also wanted to alert you to all the different tools we have developed to help determine which are the best sectors on a relative strength basis. Below we discuss the basic concepts of sector relative strength and how it is calculated. Then we highlight the different tools available to you on the DWA Internet site that can help identify a sector's relative strength compared to the overall market. Sector Relative Strength is a great tool to use when trying to determine which sectors are outperforming the market. Given the fact that the Sector is one of the greatest contributor to price fluctuation in a stock, it is extremely important to determine the relative strength. Those sectors exhibiting positive relative strength (ones in a column of X's on their RS chart) are the ones to focus on.
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Welcome:
Lesson 5:
Part 2 - Continued
The sectors which we follow RS readings for are listed below. You can access this data on the DWA site by clicking on the "Indices" link in the bottom-left quadrant. Then click on the "Sector" link at the top of the page and this will bring up the list of sectors and will show a column that says "RS vs. SPX". On this same page will be a list of our DWA Equal Weighted Sector Index Relative Strength readings. We developed these DWA indexes, (and RS charts for them), to give you a broader view of how a sector is performing on a relative strength basis. The RS charts for the cap -weighted SOX and the DWA Semiconductor index will more often than not tell the same story, but these DWA Sector RS charts will be especially helpful for those sectors which don't have an exchanged based sector index, such as the Media group, or Restaurant sector.
Again when using these RS charts, you want to focus your buying (or owning of stocks) in those sectors which are in a column of X's on their RS chart - they are the ones which are outperforming the market. This tool is extremely important to use when the sector bullish percent may be close to a reversal down. It will help keep you in at least partial positions of stocks that reside in strong RS sectors, rather than dumping the whole position out if the sector bullish percent reverses down into O's. Let's use Intel (INTC) as an example. The Semiconductor bullish percent reversed down from high levels, but the relative strength for the sector has not waned at all. On all measurements, the RS for the Semiconductor group remains very strong. So if you owned INTC, instead of selling out the entire position, you would have been better off to only trim the position, keeping some exposure in the group due to the strong RS reading of the sector. Again, remember the concept is to outperform, and we think the best measurement for this is RS. Now let's go over some of the other tools that are at your disposal that can help you try to get a handle on sector relative strength. There are two other forms of charts we keep that can give you insight into sector relative strength, or the underlying strength of the stocks which make up a given sector. We have developed a chart that will show you the percent of stocks in a given sector, or for that matter given market class - NYSE, Optionable Universe or OTC, which are in a column of X's on their RS charts. We plot this percent like we do our other bullish percents, from 0% to 100% using a 6% reversal to change columns. To the right we show you one of these charts on the OTC market. This chart shows you the percent of OTC stocks which are in a column of X's on their RS charts. You can see the weakness in March and April wit the percent od stocks in this universe falling from 52% to a low of 28%.
Percent OTC stocks whose RS is in X'S (RSXOTC ) 58 56 54 52 50 48 46 44 42 40 38 36 34 32 30 28 26 24 22 20 18 16
| | | | | | | | | | | 3 ------------ +-+---X O--X | | X O X O | 2 O A O | 1 O X C | X O ------------O +---C O--5 | B 4 7 6 | A O X 8 X 9 O 6 O 1 O 7 O X ------------9 C O X O-XO X 4 X O A X O | O | | | | | ------------ +-+---+-------| | | | | |
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Look at the RSXNYSE chart (those stocks on the NYSE which are in X's on their RS charts). At the time the OTC RSX chart was reversing down this chart reversed up. A clear sign of the divergence we saw in these to markets after the first quarter of 2000.
Percent of NYSE stocks whose RS is in X's (RSXNYSE)
We take it a step further and keep a chart that shows the percent of stocks in a given group that are on an RS buy signal. These charts we denote with RSP then the first four letters, such as RSPSEMI or RSPOTC. Both of these indicators are longer term however, this indicator takes longer to develop. The RSX tool will be a bit more "responsive" or "active", while the RSP will be a little slower because the RSP chart is the percent of stocks on an RS buy signal, and as you know it takes longer to give an RS signal change, than to just reverse up or down on stocks' RS chart. The RSX and RSP charts can be found under the link entitled "DWA Technical Indicator Report" in the bottom-left quadrant. At the top of the page that comes up, you can click on either "RS Pos" or "RS Col X" to access the list, or you can specifically pull the chart up by using RSX or RSP then the first four letters.
Percent of stocks on an RS buy signal. Using the Semiconductor Index (RSPSEMI)
48 46 44 42 40 38 36 34 32 30 28 26 24 22 20 18 16 14 12
60 58 56 54 52 50 48 46 44 42 40 38 36 34 32 30 28 26 Now this all may sound a bit confusing, but stand 24 back and take some time to look through these 22 charts using the database site. You will be amazed 20 the story they tell you. In time you will become adept 18 at evaluating them, and this will aid you in 16
determining sector relative strength. Remember, all you can do is stack as many odds in your favor as possible, use the tools correctly, then make a decision. It doesn't guarantee you will get the outcome you always want or expect, but over time you will be a winner. The bottom line, do not ignore sector relative strength - it is one of the most important tools at your disposal.
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| | | | | | B | ----------X O -----A O X 5 | 6 | 7 X ---------- +-8 6----| 9 5 | O 3 | A X | 3 X ---------- +-4----| | | | | | | |
------------ +----| | 1 | X A | C ----------X O X ---9 O B X C X X O A X O X ----------8 O 9 ----X 1 7 O X 3 X O 6 ------------O 2 ----6 1 O X O C O X ------------7 X ----9 | | |
Different Sector Relative Strength Tools: 1. Sector (Index) Relative Streng th Chart 2. DWA Sector Index (Equal Weighted) RS Charts 1)
Sector Index Relative Strength 2) Readings
DWA Sector Index (Equal Weighted) RS Charts.
Symbol
Index
Sector Index
Symbol
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AUX BIX BKX BMX BTK CEX CWX DOT DRG DUX FPP GAX GOX HCX HMO HUI HWI IIX INX IUX MSH NWX OIX OSX PSE RLX RMS RXH SOX TRAN TRX TXX UTIL UTY XAL XAU XBD XCI XNG XOI XTC
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Cboe Automotive Index S & P Banking Index PHLX Bank Sector PHLX Computer Box Maker Amex Biotechnology S & P Chemical Index Cboe Computer SFTWR PHLX the Street.Com Net In Amex Drug Index Dow Jones Utility Average PHLX Forest & Paper Produc Cboe Gaming Index Goldlinx Intl Inc S & P Healthcare Amex M.S. Healthcare Servi Amex Gold Bugs Index Computer Hardware Index Inter@ctive Week Index Cboe Internet Index S & P Insurance Morgan Stanley High Tech 3 NWX - Amex Networking Indx Cboe Oil Index PHLX Oil Service Sector Pse High Tech Index S & P Retail Index Amex M.S. Reit Amex M.S. Healthcare Hosp PHLX Semiconductor Dow Jones Trans Avg S & P Transportation Index Cboe Technology Index Dow Jones Utility Avg PHLX Utility Sector Amex Airlines Index PHLX Gold & Silver Index Amex Broker Dealer Amex Computer Index Amex Natural Gas Amex Oil Index Amex Telecom
DWAAERO DWAAUTO DWABANK DWABIOM DWABUIL DWABUSI DWACHEM DWACOMP DWADRUG DWAELEC DWAEUTI DWAFINA DWAFOOD DWAFORE DWAGAME DWAGUTI DWAHEAL DWAHOUS DWAINET DWAINSU DWALATI DWALEIS DWAMACH DWAMEDI DWAMETA DWAOIL DWAOILS DWAPREC DWAPROT DWAREAL DWAREST DWARETA DWASAVI DWASEMI DWASOFT DWASTEE DWATELE DWATEXT DWATRAN DWAWALL DWAWAST
DWA Aerospace Index DWA Auto Index Dorsey Wright Bank Index Dorsey Wright Biomedics Dorsey Wright Building Dorsey Wright Business Dorsey Wright Chemical Dorsey Wright Computer Dorsey Wright Drug Index Dorsey Wright Electronics Dorsey Wright Electric Util Dorsey Wright Financial Dorsey Wright Food Index Dorsey Wright Forest Prod Dorsey Wright Gaming Index Dorsey Wright Gas Utility Dorsey Wright Healthcare Dorsey Wright Household Goods Dorsey Wright Internet Dorsey Wright Insurance Dorsey Wright Latin America Dorsey Wright Leisure Dorsey Wright Machine Dorsey Wright Media Index Dorsey Wright Non Ferr Metals Dorsey Wright Oil Index Dorsey Wright Oil Service Dorsey Wright Precious Metal Dorsey Wright Protect/Safety Dorsey Wright Real Estate Dorsey Wright Restaurant Dorsey Wright Retail Index Dorsey Wright Saving & Loan Dorsey Wright Semiconductor Dorsey Wright Software Ind Dorsey Wright Steel Index Dorsey Wright Telephone Dorsey Wright Textile Index Dorsey Wright Transport N/A Dorsey Wright Wall Street Dorsey Wright Waste Index
Welcome:
Lesson 5:Wrap Up
Sector rotation is a very important aspect to investing beca use it unveils opportunity in the market which is usually unrecognized until it is too late. Often the media "hypes" a particular sector when it is already over bought and at its peak. PnF allows you to recognize opportunity when it is the hardest to spot. Part 1: Sector Bullish Percents.
Perfect Market Timing vs Perfect Sector Timing DWA Individual Sectors. Sector Bell Curves Examples
Part 2: Sector Relative Strength
Sector Relative Strength Intel Example Sector (Index) RS Chart DWA Sector Index RS Charts
We will now test you to find your comprehension of the subjects discussed in Lesson 5.
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Testing for Lesson 5 1) Match the Risk levels with the description and chart.
Bull Confirmed Market
Bear Confirmed Market
Bull Alert Market
Bear Alert Market
Bull Correction Market
Bear Correction Market
1: 30 28 26 24 22 20 18 16
2: O 78 O 76 X O 74 X O X 72 X O X 70 X O X 68 X O 66 X 64 X 62 60
O O O O
3:
4:
5:
50 48 44 42 40 39 38 37 36 35 34
58 56 54 52 50 48 46 44 42 40 38 36 34 32 30
60 58 56 54 52 50 48 46 44 42
X X X X O X X O X X O X X X
X X X O X O X O X O X O X O O X O X O X O X O X X O X X O X X O X
6: X X X X X X X X
O O X O X O O X O O O O
70 68 66 64 62 60 58 56 54 52 50
X X O X O X O X X X X O X X O X X O X X O
2) Here is a chart of the Aerospace Airlines sector. At this point what would you do with the stocks in your portfolio that belong to t his sector? 80 78 76 74 72 70 68 66 64 62 60 58 56 54 52 50 48 46 44 42 40 38 36 34 32
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X X X 3 X X X X X X 2 X X
----------+------------- +---------O | | O | | 4 | X | X 5 | 9 O | 4 O O X ------+-------X O -- +-----X O O X O | X A | X O O X O | 7 O | X O X 6 | X O | 3 O O | X O X | X ----7 ----+-------X O X O ----X O X X O X O X O X B O X 6 O X O X O 9 O X O 3 O X O C O X X O X O X 1 X O 5 B X O 1 O X ------O X A +-O X 4 X O X O X O 2 O X | O O X O O X O X O X | O O O X O X | | O O 8 | | ------O X --+------------- +------O X | | O | | | | | |
Buy as many good fundamental stocks as you can. Boycott the airline industry and vow to take trains and boats for the rest of your life.
Evaluate your stocks for weak issues that may be in trouble and either sell or hedge them. Wait for a reversal up to buy more stock.
3) Same sector. What would you do with stocks in this sector here? 80 -------------- +------------- +-----------78 | | 76 | | 74 X | | 72 4 O | | 70 ----X O ------+------------- +-----------68 X O | | 66 X O | | 64 3 5 | X | 62 X O | X X O | 60 ----X O ------+-X O 5 O ----+-----------58 X O C | X O X O | 56 X O X O X 2 X O | X 54 X X 6 X O X O X O X | X O 52 1 O X O X O X O X 6 X O | X O 50 X O 2 O ----X O X O X O X O +---X 4 ----48 X O X O X O 1 O X O O | X O 46 O X O X O X 3 4 O X X O 44 O 7 B O X O X 8 1 O X O 42 O X O O X O X O X O 40 -------O ----X +---O ------O X O 3 O ----38 O X | 9 C 2 X O 36 8 X | O X O X O 34 O X | O X O 32 O X | O B 30 -------O ----X +-----------O X ----------28 O X | O X 26 O X | O | 24 O X X | | 22 O X O X | | 20 -------O X O X +------------- +-----------18 O X A X | | 16 9 X O | |
Liquidate all issues because a sell signal is coming up. Wait for the sector to move below 30% to find the really good deals.
Still vowing never to fly again. Consider buying strong stocks in this sector.
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4) Answer the following questions with regard to this Bell Curve: wast TRAN TEXT reta REAL mach wall stee prot semi meta tele SAVI heal inet prec EUTI comp SOFT drug biom medi BANK 0-14% 16-20% 22-26%
leis lati fina busi BUIL elec auto 28-32%
oils rest asia aero 34-36%
hous insu fore 38-42%
GUTI FOOD GAME euro CHEM oil 44-46% 48-52% 54-56% 58-62% ...
a. Looking at this Bell Curve, the market is:
Normal
Oversold
Over bought
b. Will this Bell Curve move more to the right or to the left from here? Right
Left
Can't tell
c. The sectors in this Bell Curve are predominantly:
In X's
In O's
d. Looking at the Drug sector (drug) on this Bell Curve, would you consider buying stocks in this sector? Yes, drug stocks have been slammed by the media so it has to be time to buy. No, it isn't below 20% yet. Yes, the sector is in X's below 30% - you can buy stocks, whether weak or strong.
Not yet, the sector is still in O's and has not reversed up yet. I'd have to see the actual chart to see where it normally resides. Sector Relative Strength.
Complete the formula for the Sector RS reading by selecting the correct entry for each of the field s.
(
- Select One -
Score Test
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/
- Select One -
)(
- Select One -
) = Sector RS Reading
Lesson 6 Introduction
Here we put it all together. Everything you have learned in the previous 5 chapters will come together here. We will show you how to combine different aspects of the market to assess risk for trades or long term investing. Rules of investing and trading examples. You will see how important it is to understand each individual concept combined with the larger picture to make informed decisions towards your investments. Test yourself at the end of the chapter to sharpen your skills.
As with any chapter, if you have any questions, click on the questions button (?) and it will be answered shortly (within 48 hours). You can also look at the link for questions above and see if the same question has already been answered.
Message Board
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Timing the Trade
Now we put the pieces of the puzzle together. Truly successful investors have some guidelines they adhere to religiously. The following steps, combining what you have learned in the previous chapters, will help you develop an effective game plan.
Part1: Initiating Positions - Four Step Check List Part 2: Stock Selection Criteria/Techniques Part 3: Summary Part 1: Initiating New Positions - The Four Step Check List. INITIATING NEW POSITIONS: A FOUR STEP CHECKLIST
As we have said many times in the past, we recommend a top -down approach to investing. In light of that, we designed a four step process that you should go through when initiating new positions. Many of you are probably well aware of this approach, yet we thought it would be a good review for you, given the recent changes in the market indicators. Below we list the four step checklist -- each step is listed, then we list ways that you can accomplish each step. In addition to that, we have supplied you with a checklist of sorts to help you accomplish Step Four more easily. We recommend that you literally go through and evaluate each stock you are considering buying. Once you have determined a fundamentally sound inventory to work from, go through and write down the Pro's and Con's (technical picture) of each stock you are considering for purchase. The checklist below can help you accomplish this. Basically, it is the old saying "a picture paints a thousand words" - you will be able to clearly see before your eyes, in writing, the positives and negatives of each stock. Hopefully this will help you make sound, clear-cut decisions, without emotion. STEP ONE: What to Do: Use the NYSE Bullish Percent, Option Stock Bullish Percent, OTC Bullish Percent, High-Low Index, 10 Week and other indicators to determine if you play offense or defense.
How to Do It: Every Thursday, we review all of our Technical Indicators in the Daily Equity Report. In addition, we feature important changes in the Option Stock BP, High-Low Index and other daily-kept indices intra-week in the Market Comment section when changes occur. You can also follow the market indicators using our DWA Internet Database/Charting site. STEP TWO:
What to Do: Determine which sectors suggest offense (and what their respective field position is) - those in a column of X's on their Sector Bullish Percent chart. It is best to stay with those sectors that are bullish and below 50%. Determine how a sector is doi ng relative to the S&P 500. Ideally, you want to invest in sectors which are outperforming the SPX (are in a column of X's on their RS chart). How to Do It: Every Thursday, we update the Industry Group Bullish Percent readings; and present the Sector Bell Curve. This allows you to see where each sector lies and what its status is. As well, in Thursday's report we do a summary of all the changes in the Index Relative Strength readings. The sector bullish percent charts and the Index RS charts are available for viewing via our internet site, too.
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STEP THREE:
What to Do: Create and maintain an inventory of stocks to work from. Use any number of sources available to determine those stocks deemed fundamentally sound. In this step you are determining "What" (specific stock) to buy. How to Do It: Use your firm's Recommended List, the S&P Outlook STARs, Value Line 1's & 2's, or some other fundamental sorting method you deem reliable. Separate your fundamental list (inventory) by sector. Then keep a Point & Figure chart on those stocks you deem the very best fundamentally (again separating them by sector). Our database program allows you to set up portfolios, so you could easily keep a "fundamental favorites" list using that function. STEP FOUR:
What to Do: Review fundamentally sound stocks on a technical basis to cull out those controlled by demand, those that demonstrate the best technical picture. This will narrow your (fundamental) inventory down to those issues with the best probability of moving higher. In this step you are determining "When" to buy a specific stock. How to Do It: Keep your own charts (update them daily by hand). Read the Daily Equity Report each and every day as we present a multitude of technically sound ideas each day. Use the DWA Internet Database site - in particular, the "Search/Sort Query Function". When trying to narrow your list down using Dorsey, Wright Research, you should ideally focus on those stocks which are in an overall uptrend (trading above their bullish support line), have positive relative strength versus the market and their specific sector, are on a point & figure buy signal on their trend chart, have positive momentum, and present a good risk -reward ratio. In summary, try to adhere to this four step checklist when initiating new positions. By paying attention to the market and the sector risks (opportunities), and then coupling the fundamentals with the technicals, your odds of success should increase. Not every trade will work out, but this gives you a definable " Game Plan", something your competition doesn't have. Stick to the plan, make your decision, then manage the outcome.
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Part 2: Stock Selection Criteria/Techniques. Fine Tuning Your Entry Point -- (A closer Look at Step 4)
We discussed the 4 step proccess and will now take a closer look at step 4. This is evaluating the individual stock on a technical basis. The first two steps, evaluating the Markat and Sector were covered in previous chapters. The third step, working within a group of fundamentally sound st ocks, is left to you. Before you can evaluate a stock you must first identify your investment goals. A trader will evaluate a stock differently than an investor. The trader may only be looking for a couple points while the investor has a longer time horizon in mind. 1: The PnF Chart. Patterns, Resistance, Support, Change in Trend, Big Bases.
When evaluating a chart watch for areas of support and resistance. If you are considering a long position you want to make sure the stock has not risen to a resistance level. Look for pullbacks to support as buying opportunities. Trend line violations are very significant and should not be ignored. A stock that violates a trend line is standing up and shouting "Look at Me!" If you own a stock that has violated its bullish support line you MUST evaluate it. You may choose to give it additional room or you may choose to sell it, but whatever you do make sure your game plan is in place and updated. Finally, watch the chart for patterns that have been successful in the past. We have discussed many in this university such as the Bullish Catapult and the Bullish Triangle. By sticking with charts that have patterns showing demand in control your chances of success are greater. With all of the fundamentally sound companies availab le for you to invest in, why buy one that dosen't have a chart showing demand in control. 2: Relative Strength. The best combination for RS is positive (buy signal) and in a column of X's. Watch for changes in signals, and for reversals. Keep track of those stocks that hold up well despite sector weakness, market divergences. Check the relative strength chart to be sure the stock is currently outperforming the broad market. At least insure the stock is rising in a column of X's on its relative strength chart. 3. Sector Rotation. Constantly stay abreast of where the particular sectors reside with respect to their field position. If a sector is below 30%, watch closely for a reversal up and be ready when it does. You can consider toe-dipping when you start to see the sector up tick. Take note of any changes in status. Be aware of nuances for particular sector bullish percents. Couple this with sector RS, placing emphasis on positive RS sectors. 4: Momentum - Daily, Weekly, Monthly. Important to watch for changes from negative to positive, especially if it has been negative for a long time. We use weekly momentum predominantly, but daily is very helpful for short term trading; and monthly is helpful for longer term changes in direction. - 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 6 to 8 weeks on average. We can calculate the number at which momentum will change to positive or negative. If the price of the stock is below or above the cross point the momentum changes. A price (last) that is lower than the cross number turns the momentum nega tive. A price that is higher than the cross number turns the momentum positive. 5: Trading Bands - 10 day and 10 week. These calculations give you an idea of the overbought or oversold nature of a stock. The weekly distribution uses 10 weeks of data. It is displayed on the charts using TOP, MED, and BOT at the corresponding levels. Top equates to 100% overbought and BOT is 100% oversold. Med is the midrange where we say the stock is neutral (normal) on its distribution.
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Wkly Distribution
+ + + + | + + | + + | + + | + + | + + | + + | + + | + ------------------- |------------------100% Oversold Normal 100% Overbought
6: Gaps Down. News items or earnings reports come out that cause a stock to drop sharply. Often times it will get an initial bounce back up. Watch to see if stock has pulled back to an area of good support. This situation often provides quick trade. You can use the 18 O's down link to find potential ideas. 7: Risk-Reward: Has the stock pulled back? Identify the stop point, what the Price Objective is, where the resistance lies, and if the stock is close to support. You want to know what the risk is if the trade does not work out. You must be able to handle the worst case scenario.
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Part 2: Stock Selection Criteria/Techniques. Fine Tuning Your Entry Point -- (A closer Look at Step 4 cont.) 8: Taking Profits. Have an idea of what you are looking for going into the position. This relates to Risk Reward mentioned on the previous page. Have a sell discipline, be willing to take partial profits. Sell a third once up 30%. Sell a second third once up 50%. Hold the last third until technical picture dictates. This allows you to take money of the table but at the same times lets the position run. 9. Stop Points - When a trade doesn't work out. Know your stop point and respect it. Be willing to take action, don't become paralyzed. paralyzed. You are willing to take small profits, also be willing to take small losses. 10. Review Positions. Constantly review the stocks you own. Raise the stop points. Evaluate the reasons why you bought the stock, have those reasons changed? 11. Don't fall in love with a position, is there something better? An account has limited capital so ask yourself if the position is the best one to be in here, i.e. did you buy the stock for a trade then it became a long term investment? Are you tying up capital that can be put to better use? This goes hand in hand with reviewing your positions regularly. Don't get sucked into "the fundamental trap" - has the technical picture deteriorated.
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Lesson 6 Wrap Up
This university has been a good starting point to learn about the Point and Figure Methodology. However, be sure to get a copy of Tom's book on Point and Figure charting. It is the most complete resource on the topic. Over these six lessons we have covered the PnF methodo logy in detail, from the basics of how to chart to the details of how our market indicators are created and followed. Lesson six provided details of how you can take what you have learned and create a playbook for suscessful investing. It is important to note that this methodology is not a science but an art. To be good at this methodology requires pratice, and a lot of it. Only by constantly evaluating charts will you refine your skills and become a true craftsman. As we like to say, once you find religion you have to attend church. The link in the lower right will take you to a case study. st udy. In the study you will be given indicator data as well as charts on stocks. You will be given $200,000 of pretend money to make investment decisions. The charts and data are real although the names have been changed. at the end we will tell you when and who you were investing i n. Be sure to read the directions and have fun!
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Game Rules
Start with $200,000 to manage through five consecutive m arket scenarios. Click on the View Indicators link at the top of the summary table to see the information given on the indicators and to decide whether you want to initiate new positions, raise cash, or remain on the sidelines. You will have 17 stocks to trade. Click on the symbol to see the chart. In each section they will be updated so you can see how your st ocks are doing. The computer will act as the accountant and you are the advisor. Simply fi ll in the fields indicating the appropriate action. NO shorting and NO margin. You can enter Limit and Stop Orders. You will see in the next round if your Limit or Stop Order has been hit. Make sure you allocate money for the limit transactions. Limit and Stop orders will NOT carry forward and must be entere d in each section if you want to use them. The price of the stock is the last l ast price on the stock chart. Each section must be completed consecutively. No going back. Here are a couple of helpful hints.....
Consider printing the Indicator Page. With so m any pages to look at it is helpful to have this one nearby. You have the ability to enter notes underneath the name of each stock. Use this field to describe orders you have entered and why you entered them. If you need to start over you can click on the reset everything link and it will COMPLETELY wipe the slate clean and you can start over. Click here to start Section Sect ion I
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