POINT & FIGURE CHARTS OFFER EASILY SPOTTED BUY AND SELL SIGNALS -- USING STOCK SCAN P&F ALERTS -- NYSE BULLISH PERCENT INDEX IS IN UPTREND BUT OVERBOUGHT
POINT & FIGURE CHARTING... Although most of the charts shown in our Market Messages are bar and candlesticks, you should be aware of a third type of chart that can be extremely helpful in spotting market signals -- the point and figure chart. In my view, the main value of p&f charts is their simplicity and precision. Buy and sell signals are easy to spot and leave little room for doubt. Chart 1 shows a p&f chart for the Dow Industrials. You can see alternating x and o columns. X columns represent rising prices, while o columns show falling prices. A buy signal is given when the latest x column exceeds a previous x column (an upside breakout). By contrast, a sell signal is given when the last o column falls below a previous o column (breaking support). The red and blue lines are support and resistance lines drawn at 45 degree angles. The breaking of those lines also helps determine if trend changes are taking place. On the charts shown below, "three-box reversals" are needed to move into the next column. You can vary the sensitivity of the chart by adjusting the box sizes. Smaller box sizes are more suitable for short-term trends, while larger boxes are better for long-term signals. Chart 1 shows a "traditional" box size of 50 points for the Dow Industrials (the default value). The initial buy signal was given at 7000 during March when the Dow first exceeded a previous x column (the red numbers mark the start of a new calendar month). Since that first p&f buy signal, no less than ten subsequent buy signals were given. During that uptrend, only one sell signal was given in mid-April (which was quickly reversed). The last column of green boxes (today's action) shows the Dow retesting its recent high at 8800. A close at 8850 or higher would keep the uptrend intact. A close at 8600 or lower is needed to give a short-term sell signal. Obviously, the best buy signals are the earlier ones. Each successive buy signal carries more risk. Stockcharts also allows you to use "percentage" box sizes (which is the technique I prefer). Chart 2 shows a 1% box size for the Dow over the same time span. Using a 1% box size for all markets eliminates the need to custom your chart to each index. Six buy signals have been given in Chart 2 since March with no sell signals.
Chart 1
Chart 2
S&P 500 P&F SIGNALS... Charts 3 and 4 show how different box sizes vary P&F sensitivity. Chart 3 shows a 1% box size for the S&P 500 which is more suitable for short-term signals. The first buy signal was given during March at 727. Several short-term signals have been given since then (including two sell signals which were quickly reversed). Chart 3 shows the S&P having just achieved another upside breakout. It would have to close at 878 or lower to issue another sell signal. Chart 4 uses a 2% box size which is more suitable for longer-term signals. A much later buy signal was given there in April at 847 (which coincided with the breakout of the red resistance line). Chart 5 shows the SPX challenging its January high. A close at 954 or higher is required to achieve another upside breakout. I don't suggest that you use p&f charts by themselves. They should be used as an adjunct to your other technical work. Once you've decided to take some action in a market, p&f charts are a great timing aid. They provide timely buy signals during an uptrend, and let you know where you can protect those profits by placing stoploss orders below support at previous o columns.
Chart 3
Chart 4
P&F ALERTS IN STOCK SCANS... The Stockchart Stock Scan section offers you "P&F Pattern" alerts for stocks and mutual funds. Each day, buy and sell lists are given based on various p&f patterns. The buy signal I described above is a simple "double top" breakout where only one previous column is exceeded. Stronger signals are given when "triple top" and "quadruple top" breakouts take place. You can be more selective by limiting your search to those stronger chart patterns. Today's scan listed several quadruple alerts under the Nasdaq, NYSE, and Mutual Fund columns. I've chosen one from each list and screened for those that were trading above their red resistance line. Chart 6 shows Illumina achieving a quadruple breakout on the Nasdaq. Chart 7 shows The Men's Wearhouse doing the same on the NYSE. Chart 8 shows the Fidelity Select Natural Resources Fund (FNARX) having achieved an impressive p&f breakout and has just exceeded its 45 degree resistance line. These aren't necessarily buy recommendations. I'm just using them as examples of how you can use the P&F Stock Scans to find stocks or funds that you might want to take a closer look at.
Chart 5
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Chart 7
NYSE BULLISH PERCENT INDEX ... This is one of the most popular indicators for measuring the overall trend of the big board. The BPNYA measures the percent of NYSE stocks that are in point & figure uptrends. Chart 8 shows its trend since 2000 with a 2% box size. Buy and sell signals on the BPNYA are similar to any other p&f chart. The last signal given was a buy at 50% which took place during April. Readings over 50% are generally associated with a bull market. Lesser signals can also be spotted by three-box reversals from oversold territory below 30% and overbought territory over 70%. Using that technique, an initial buy signal took place with an upside three-box reversal at 20% during March. At the moment, the BPNYA is still in an uptrend but has reached overbought territory over 70%. For a short-term sell signal to occur, however, a three-box reversal down to 68% is necessary.
Chart 8
