POINT & FIGURE CHARTS ARE HELPFUL IN GIVING PRECISE BUY AND SELL SIGNALS -- USING BAR CHARTS TO SPOT SHORT-TERM SUPPORT AND RESISTANCE LEVELS

P&F SIGNALS ARE MORE PRECISE ... Once in a while, I like to review the merits of point & figure charting which can be used as an adjunct to other charting methods. As I've pointed out before, one of the most compelling virtues of p&f charts is their simplicity. Point & figure buy and sell signals are very precise and leave little doubt as to their existence. You can also adjust the p&f box sizes to vary their sensitivity. Charts 1 and 2 show two examples of that. But first a brief explanation of the charts themselves. P&F charts show alternating columns of Xs and Os. Each X column represents rising prices,, while each O columns shows falling prices. Most chartists require a three-box reversal to occur in order to move into the next column. A buy signal requires the last X column to exceed a previous X column (an upside breakout). A sell signal occurs when the last O column falls below an earlier O column. The size of the box determines the sensitivity of the chart. Chart 1, for example, uses a 1% value for each box and is more useful for shorter-term signals. The last buy signal occurred at 935 during July (marked by the red letter 7). The S&P has just resumed its uptrend. In order for a short-term sell signal to occur, the S&P needs to close at 975 or lower. Prices in Chart 1 remain above a blue support line which rises at a 45 degree angle. Chart 2 uses a 2% box size and is more suitable for long-term signals. A major buy signal was given at 847 during April (which broke the falling red 45 degree resistance line). The S&P would have to close at 864 or lower to negate that major buy signal. One cautionary note in Chart 2, however, is that chart 2 shows a five-wave advance off the March low. That suggests that the five-month advance may be in need of some corrective action.

Chart 1

Chart 2

SHORT-TERM SUPPORT LEVELS STILL INTACT... You can use either P&F or bar charts to look for short-term support and resistance levels. Charts 3 and 4 show initial support levels for the Dow and the Nasdaq Composite at their August lows of 9116 and 1929 respectively. No serious downside correction can occur until those initial support levels are broken. Chart 5 shows the reverse situation in the CBOE Volatility (VIX) Index. For an upturn to occur (which would coincide with a downturn in stocks), the VIX needs to close above its August high at 28.39.

Chart 3

Chart 4

Chart 5

EMERGING MARKETS START TO STRUGGLE NEAR SUMMER HIGH... Although no chart sell signals have been given, I remain concerned that the global stock rally is over-extended. It's also a little troubling to see that none of the big four emerging markets have made it to new high ground. Brazil iShares did it briefly (Chart 6), but weren't able to hold their gains. Charts 7 and 8 show the India ETN and the Russian ETF trading below their summer highs. Most troubling of all is the recent slide in China iShares (FXI) as shown in Chart 9. No actual sell signals have been given yet. For that to happen, prices would have to close below their August lows. If the slide in China continues, however, that could cause some short-term problems in commodities as well as stocks.

Chart 6

Chart 7

Chart 8

Chart 9

COMMODITY SUPPORT LEVELS TO WATCH ... Chart 10 shows the DB Commodities Tracking Fund (DBC) backing off its June high. That's often an early sign of an impending correction. A close below its August low at 22.05, however, is needed to turn its short-term trend lower. Chart 11 shows a similar chart pattern in the United States Oil Fund (USO). A potential double top exists near 40. An actual sell signal, however, requires a close below its August low at 34.91.

Chart 10

Chart 11

CURRENCY LEVELS ... Although the U.S. Dollar Index is very oversold, no actual buy signal has yet taken place. For that to happen, the UUP would have to close above its August high at 23.68 (Chart 12). Chart 13 shows intial support for the Euro to be at 140.47. The Japanese yen has been showing some pop over the last week. Chart 14 shows the XJY moving up to challenge its August high just above 107. A close over that level would turn its short-term trend higher. There are no predictions on the accompanying charts (other than my recent comments that stocks and commodities are overbought and dollar oversold). Even so, it's good to know where chart levels are located that would signal any short-term changes in trend. That's what these charts are intended to show. [Editor's Note: Arthur Hill is on vacation this week].

Chart 12

Chart 13

Chart 14