APPLYING PERCENTAGE BOX SIZES TO POINT & FIGURE CHARTS ON THE DOLLAR, COMMMODITIES, AND BOND ETFS
USING PERCENT P&F BOX SIZE ... My recent point & figure articles have been limited to stock indexes and traditional box sizes. Some readers have asked about the use of "percentage" box sizes. I find percentage box sizes very helpful, especially when looking at financial markets other than stocks. Since markets like commodities, currencies, and bonds are quoted in different ways, percentage box sizes makes for easier trend comparisons. Here again, some judgment is needed. For stocks, I generally use a 2% box size for longer-term work, and a 1% box for shorter term signals. In other markets, I generally stick to a 1% box for trend work and a .50 box size for trading signals. As an example, Chart 1 applies a .50% box to the Power Shares US Dollar Bullish Index Fund (UUP). A buy signal was given in January (red box one) when an X column hit 23.23 and exceeded three previous X columns. The red resistance line was exceeded shortly after that. Chart 2 shows how the p&f signals compare to signals on a daily bar charts. You'll see that the two charts complement each other very well. The green circle in Chart 2 shows that the p&f buy signal took place on January 23 at 23.23 which coincided with an upside breakout through the December intra-day high at 23.20. The ability of the UUP to climb above its 200-day moving average a couple of days later coincided closely with the breaking of the the red p&f resistance line. A second upside breakout is shown on the p&f chart at 23.94 during March. That coincides with the UUP exceeding in late February intra-day high at 23.89 in Chart 2. A p&f sell signal at this point would require a drop to 23.23 which would undercut its last O column. Chart 2 shows that a drop to 23.23 would also undercut the mid-March intra-day low at 23.34 and the blue 50-day moving average. In other words, most of the trading are the same on both charts. So why use the p&f version? Primarily because the p&f signals are much easier to spot and leave much less doubt. The trick is to choose the right box size for the market and time dimension that you're trading (which may require some experimenting). Whichever technique you use to determine the correct box size (traditional or percentage), the principle is always the same. Use a bigger box size for long-term signals and a smaller box size for short-term decisions.
Chart 1
Chart 2
APPLYING A 1% BOX SIZE TO OIL AND GOLD... The 1% box in Chart 3 shows Gold Trust Shares (GLD) on a buy signal given in February. The February correction stopped just above the rising blue support line. Chart 4 shows the United States Oil Fund (USO) consolidating in a trading range within an uptrend that started during January. The last signal was a buy. A close at 40.58 or higher would represent a major bullish breakout, while a close at 38.23 or lower would trigger a sell signal. [Although p&f charts use "intra-day" highs and lows to generate signals, I require that prices actually "close" at the buy or sell point. That helps weed out some bad signals].
Chart 3
Chart 4
BOND P&F CHARTS ... Perhaps the greatest strength of point & figures charts is their ability to keep traders on the right side of a trend. The next four charts demonstrate how that works in the fixed income arena. The charts also show that some fixed income prices can rise while others fall. All four charts employ a 1% box size which makes for easy comparison. Chart 5 shows the Barclays 20+Treasury Bond Fund (TLT) in a p&f downtrend which started with a sell signal last December (red letter C). By contrast, Chart 6 shows the Investment Grade Corporate Bond IShares (LQD) in a p&f uptrend since last May (red letter five). Chart 7 shows the High Yield Corporate Bond Fund (HYG) in a p&f uptrend since last April. The HYG would have to drop to 82.25 to trigger a sell signal. Chart 8 shows the TIPS Bond Fund (TIP) in a p&f uptrend since last March. Since each box is worth 1%, a 3% price reversal is necessary to move the rising X column into a O column. That requirement eliminates a lot of short-term "noise".
Chart 5
Chart 6
Chart 7
Chart 8
POINT & FIGURE CHARTS ARE PRICE SENSITIVE ... Point & figure are not "time sensitive" which differs from bar charts that are. A new bar (or candlestick) is added each day even if prices don't move. A new X or O is only added if prices move a pre-selected amount (depending on the box size). In other words, p&f charts are "price sensitive". That allows traders to focus exclusively on price movement which is all that really matters (and what profit and loss statements are based on). I'm not suggesting that either chart form is better. I am suggesting that both have something to offer and can be used together. Judging from the amount of feedback I've been receiving, a lot of you are already putting point & figure charts to good use. Those of you that aren't might want to take a look at the technique. The Stockcharts Chart School provides a lot of information to help you get started.
