HOW TO SENSITIVE P&F CHARTS TO SUIT DIFFERENT TIME DIMENSIONS -- USER BIGGER BOX SIZES FOR MAJOR TRENDS AND SMALLER BOXES FOR SHORT-TERM TRADING SIGNALS

CHANGE BOX SIZE TO VARY SENSITIVITY ... One of the things I like most about point & figure charts is the clarity and simplicity of their buy and sell signals. And you can adjust the charts to suit the time frame you're trading. Less sensitive charts lend themselves to longer-range trading, while more sensitive ones are more useful for short-term trading purposes. In previous articles, I've explained that the most common way to vary the sensitivity of the p&f chart is to change the size of the box. Chart 1, for example, shows the Stockchart "traditional" box size for the Dow Industrials at 50 points. This is more suitable for shorter-term trading. A short-term sell signal was given in January at 10250 (when a zero column fell below a previous zero column). That signal was quickly reversed in February when an X column rose above a previous X column at 10200. The Dow has been in an uptrend since then. A second buy signal was subsequently given at 10450 when another X column was exceeded. The problem with that box size is the number of short-term sell signals given during the uptrend. One way to get around that problem is to make the box size bigger. Chart 2 doubles the Dow box size to 100 points. That less sensitive version gave an initial buy signal last April at 8000 and has given six subsequent buys since then (each time a X column was exceeded). No sell signals have been given during that p&f uptrend which made for a much better result. One problem with Chart 2, however, is that the Dow would have to drop all the way to 9800 to trigger a "stopout" point (or sell signal). That means that a trader would have to give back at least 1000 Dow points before taking some profits. Not everyone is willing to wait that long. Especially short-term traders. One way to resolve the dilemma about box size is to use both but for different purposes. Use the bigger box (less sensitive) one to keep you on the right side of the market with most of your holdings. Use the smaller box (more sensitive) chart to fine-tune your holdings or to take advantage of short-term market moves.

Chart 1

Chart 2

NYSE BULLISH PERCENT INDEX IMPROVES... The NYSE Bullish Percent Index is the percent of NYSE stocks that are in point & figure uptrends. During February, the zero column fell to 66 which triggered a sell signal. After dropping to 60, the BPNYA achieved a three-box reversal into the plus column. Chart 3 shows the indicator bouncing back up to the 74 level, which negated the February sell signal. It would have to rise to 78 to trigger another buy signal. Problem is that would occur in overbought territory. The NYSE Composite (which has a heavy weighting in relatively weak basic material stocks) has lagged behind the other market indexes of late. Chart 4 shows the NYSE on a short-term p&f buy signal at 7150 and testing its January high. A close at 7500 or higher would trigger another p&f breakout and put all major market indexes at new recovery highs.

Chart 3

Chart 4

COMBINING DIFFERENT BOX SIZES FOR SECTORS... Here's a good example of how to combine p&f box sizes on a sector chart. Chart 5 uses a traditional one-point box on the Consumer Discretionary SPDR (XLY). A major buy signal given last April is still intact. Unfortunately, that box size didn't give any second chances for those who might have missed the original signal, or who would have liked to add more as the rally continued. That problem was fixed by simply cutting the box size in half. The half-point box in Chart 6 offered several successive buy signals (with one whipsaw last July) which allowed for additional positions. It also offers a closer "stopout" point at 28. Point & figure is the oldest form of charting in the U.S. After falling out of favor in the latter part of the twentieth century, it is making a comeback. Part of the reason why is the ability to plot p&f charts on sites like this one. You might want to learn about them. They make a nice adjunct to bar and candlestick charts.

Chart 5

Chart 6