Point and Figure

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Chartered Market Technician Institute

• Point and Figure

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Point and Figure Charts Introduction

1. Very different from Bar Candle Charts
2. Time is not a factor, the account for price only
3. Terminology
4. Point refers to the location of the price plot
5. Figure the ability to figure target prices from
   the points
6. Relatively simple to employ, only prices that
   meet the box and reversal size are used
7. The Chart reflects the High and Low, whenever
   important, which many feel is a better measure of
   supply and demand, rather than the open and
   close, which many feel to be arbitrary times

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One Box (Point) Reversal

• Price is Plotted on the vertical axis
• Time is not scaled
• Each square or box represents 1 point in the
  price
• Plot is made only when price of box is touched or
  traded through
• Change in plot to a new column is made only when
  price is trending in one direction and
  subsequently reverses by the box size or larger
• One-step-back method (only in 1-box reversal
  charts)
• Price reverses direction by the value of 1 box
  only and then reverses back in the previous
  direction, leaving an X an O in the same column
• See Figure 2-6 2-7 (next page)
• See page 66 thru 75 for step by step construction

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One Box (Point) Reversal
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Box Size

• Can be expanded or contracted depending on
  personal preference
• The larger the box size, the less noise
• The smaller the box size, the greater the detail
• Multi-Box Reversal
• Reversal can be different from box size
• 1 Point, 3 Box Reversal the most popular
• X used in columns when price is increasing
• O used in columns when price is decreasing

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Time

• With the start of a new month, a letter or number
  is used instead of an X or an O
• Sometimes a year is recorded as well at the
  bottom
• Point size recommendations
• 1pt for prices btwn 20 100
• .5pt for prices btwn 5 19.50
• .25pt for prices less than 5
• 2pt for prices greater than 100

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Figure 11.15
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Point and Figure Charts key characteristics

• Box Point are used interchangeably
• PF does not take into account time or volume
• Requires continuous time flow
• Analyzes all price action
• Disregards inactive period, concentrates on
  active
• Screens out price action that has little
  predictive ability
• SP500 futures vs SP500 cash

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Old New Methods

1. There are 2 variables used to determine Point
   Figure Charts
2. Box or Point size
3. The number of boxes for a reversal aka reversal
   amount or reversal size
4. Early version was known as one by one
5. Box and reversal sizes were equal
6. Patterns were complex and open to interpretation
7. Accurate as it included all price action
8. Newer version known as the three point reversal
9. Did not require as much data flow, can be
   estimated from daily closes or high/low
   methodology
10. Some accuracy lost because intra-day trading
    ignored
11. Clarifies as well as it ignores noise
12. Two types are very different and require
    different rules and interpretation
13. Technically 3pt reversal not really point and
    figure as it does not rely on continuous data

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One Box Reversal Point and Figure

• No longer very popular
• Patterns are not precise and require and
  experienced analyst to interpret
• One advantage The Count
• Anticipating the expected move is done by
  measuring the width of the observed base
• Consolidation/Congestion area of a one box chart
• Observation when price changes occur more
  frequently at lower level of range, odds favour
  an upside breakout and vice-versa Box and
  reversal sizes were equal
• Trendlines are drawn in the same manner as with
  bar charts
• Trendline breaks negate earlier observation

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Patterns

• Point and Figure uses both traditional and unique
  patterns
• Traditional Head and Shoulders Top
• Unique Semi-catapult and Fulcrum
• Semi-Catapult
• It is a continuation pattern
• Characteristics
• There is a preceding trend
• A pause or pullback from the trend
• Price then breaks through the price extreme of
  the preceding trend (the catapult point)
• Trend resumes (Bullish examples figures 3-3,
  page 117. Bearish examples figures 3-5, page
  118)
• FULCRUM
• It is a reversal pattern
• Easily recognized
• Holds a reliable count as it is contained by
  distinct walls
• Other characteristics
• A previous trend entering into a consolidation
• Sideways price action near the trend extreme

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See pages 167 to 170 in du Plessis
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Steps to establishing a horizontal count on a
1-box chart

• Look for a congestion pattern
• Methods for measuring the width
• Method 1 (best)
• The count that has the most filled squares is
  used, not the longest row
• Even blank squares are counted
• No exact rules on where to start the count
• Generally the longer the consolidation the more
  difficult to count due to smaller rallies and
  corrections which make it difficult to establish
  where the range began
• Method 2 (preferred if number of rows with same
  number of x o)
• Count the width of each row in the pattern,
  average and round up by 1
• The trigger is taken to be the row in the middle
  of the pattern
• Method 3 (preferred if there are walls)
• If the pattern has walls, count across from the
  start of the right hand wall to and including the
  left hand wall
• Method 4 (prefered if willing to wait for
  breakout)
• Count the width of the pattern at the breakout or
  catapult point
• Either the width between entry and exit walls at
  the catapult point
• Or the width of the pattern one row below the
  catapult point
• Correlation between range and breakout, The
  bigger the base, the higher the space

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Action Points

• Ideal Selling and Buying Points as outlined by
  Alexander Wheelan
• When all of the following conditions appear in a
  one box point and figure chart, the ideal
  situation exists
• The technical position of the market is favorable
• A clear and broad fulcrum appears after an
  extended trend
• The extreme of the fulcrum fulfils the max count
  from the start of the previous trend
• Fulcrum appears against major support or
  resistance
• The catapult coincides with the break of a major
  trendline
• The catapult occurs at a price level with little
  support or resistance in space following

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Three Box Reversal Point and Figure

• More popular than one point predecessor
• Can be plotted from prices found in the newspaper
• Close only method
• More popular, only a row of Xs or Os for the
  day
• High/Low method
• Close is ignored completely
• Reliance on the trend
• as long as extremes are made in the direction of
  prevailing trend, in accordance with the box
  size, counter trend extreme is ignored
• If no new extreme, opposite extreme is examined
  for a potential change
• See pages 95 to 103 for construction
• Requires the knowledge of only a few basic
  patterns
• Academics like it because these patterns can be
  tested
• Can have only Xs or Os in each column
• See pages 80 thru 86 for construction
• Due to asymmetry, reversals can be used as
  trailing stops

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The Count in a Three-Point Reversal Chart

• Less ambiguous and easier than 1 box charts
• Two Methods
• The Vertical Count
• The Horizontal Count
• Doesnt have establishment and activation stages
  like vertical count
• Much price action is lost in the Three Box
  Reversal, less accurate than the One Box method

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The Count in a Three-Point Reversal Chart

• 1. Vertical Count Calculation method
• Choose a completed column of Xs (establishment)
  
• The 1st move off a bottom
• The second move off a bottom if it is part of a
  bottoming pattern
• The completion of a mini-top in an uptrend
• A second column of Xs if the 1st column is a
  short column
• A significant X column breakout
• Count the number of Xs in the column and
  calculate
• Using a completed column, multiply the Xs by the
  box size and then the reversal size
• Add this value to the lowest O in the column to
  the left of the counting column for your upside
  target
• Unique to the Three point Reversal Method
• DO NOT USE THE BOTTOM OF THE PRECEDING PATTERN,
  USE THE LOW OF THE PRECEDING COLUMN
• Activate the count on a break of the counting
  column
• Reinforces the trend

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The Count in a Three-Point Reversal Chart

• 2. Horizontal Count Calculation method
• 2 methodologies
• Cohen
• Sexsmith (less popular)
• Prerequisites
• A previous trend
• A topping or bottoming pattern
• A Sideways consolidation
• A turn in trend
• Congestion Width determines the extent of the
  move
• Cohen Methodology
• Look for a congestion pattern after a trend,
  marked by walls
• Count the number of columns across the pattern,
  including the walls
• Multiply by 3 and the box size then add to the
  value of the lowest O
• Establishment and Activation stages are identical
• The exit column rises above the highest X in the
  pattern
• Logic of the Horizontal Count the larger the
  base, the higher the space

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The Count in a Three-Point Reversal Chart

• 2. Horizontal Count Calculation method
• Sexsmith (less popular)
• Same logic as the 1 box horizontal method (find
  row with most filled squares)
• Useful for continuation as well as reversal
  patterns
• Risk and Reward
• 1st unit of risk below preceding O column
  (assuming a buy for a 3 box PF.
• For a 1 box its below the count row
• 2nd unit of risk below the basing formation
  (assuming a buy)
• Vice versa for a sell
• (see page 254 for an example)

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Risk/Reward
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Pattern characteristics

• Sloping bottoms are more bullish
• Slopping tops are more bearish
• See pages 129 through 133
• Slopping tops and bottoms indicate indecision
• The breakout/pullback or breakout/retest
• One of the strongest PF signals, reinforces the
  1st breakout
• See pages 136-137

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Breakout/Re-test
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Eight Standard Patterns

1. Double Top and Double Bottom
2. Rising Bottom and Declining Top
3. Triple Top and Triple Bottom
4. Ascending Triple Top and Descending Triple Bottom
5. Spread Triple Top and Spread Triple Bottom
6. Bullish/Bearish Triangle
7. Above Bullish Resistance/Bearish Support Line
8. Below Bearish Resistance/Bearish Support Line

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Double Top/Double Bottom

• Consists of only 3 Columns
• Double Top
• Two advancing rows, One descending rows
• Double Bottom
• Two descending rows, one advancing rows
• Different nomenclature than for bar charts
• Top designates the breakout point
• Bullish Pattern
• Signal occurs when the 3rd Column breaks above
  the 1st column
• All other standard formations except lines have
  Double Tops or Double Bottoms embedded within
• Davis found that 80.3 of Double Tops are
  profitable

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Figure 16.11
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Rising Bottoms Declining Tops

• Variation on Double Tops and Bottoms
• Four Column pattern
• Rising Bottom
• First column of Os must be below the more recent
  column
• Usually the 1st column of lows declines from a
  much higher level than shown
• One possible variation is for the prior of Xs to
  be stronger
• Declining Top is exact opposite
• Davis found that 80.4 of Rising Bottoms are
  profitable

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Figure 16.12
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Triple Top and Triple Bottoms

• Triple Top occurs when prices break above two
  prior highs, vice-versa for a Triple Bottom
• Five Column pattern
• Provides greater confirmation of a change in
  trend
• Tends to be more profitable than a Double Top
• Davis found that 87.9 of Triple Tops are
  profitable, 93 of Triple Bottoms

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Figure 16.13
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Ascending Triple Tops, Descending Triple Bottom

• Varieties of the Triple Top/Triple Bottom
• Triple Top
• Three rising columns, with the second rising
  column pushing to new highs
• Two Separate Double Tops
• Denotes a strong uptrend
• Opposite for a Descending Triple Bottom
• Davis found that 79.5 of Ascending Triple Tops
  are profitable, 83.3 of Triple Bottoms

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Figure 16.14
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Spreading Triple Tops Bottoms

• More complicated varieties of the Triple
  Top/Triple Bottom
• Fairly infrequent occurrence
• Requires at least six columns
• Similar to the Fulcrum as it represents a
  congestion zone followed by a false breakout and
  then renewed congestion
• Requires three separate tops with one or more
  lesser tops between the major ones
• Breakout must rise above all tops
• Triple Top
• Three rising columns, with the second rising
  column pushing to new highs
• Opposite for a Spreading Triple Bottom
• Davis found that 85.7 of Spreading Triple Tops
  are profitable, 86.5 of Triple Bottoms

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Figure 16.15
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Triangles

• Very rare in Three Box Reversal Land
• Only larger than normal Triangles captured
• Davis found poor results 71.4 of Bullish
  Triangles are profitable, 87.5 Bearish Triangles
  were profitable
• only looked at continuation patterns

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Trendlines

• Drawn at 45 degree angles for multi-box reversal,
  subjectively for 1x1
• If price cant maintain a rise of at least the
  value of 1 box every time it makes a reversal, it
  can no longer be considered a bull trend
• Bullish Support Line
• Drawn from one box below the last observable
  column (always an O column)
• Bearish Resistance Line
• exact opposite
• General Rules
• One should never buy unless price is greater than
  trendline support
• One should never sell unless price is less than
  trendline resistance
• Trendline breaks only valid if they coincide with
  a pattern break as well

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Figure 16.8 in Kirkpatrick andDahlquist
See pages 180 through 183 in du Plessis
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Rising and Declining Trendlines

• In a rising trend, a trendline is drawn at a 45
  degree angle from the bottom
• A subsequent parallel line is drawn off of the
  earliest peak in that trend
• Two ways for the lines to give way
• A break of support aka Bullish Reversal
  Pattern
• Indicates a major turn in trend
• Upward Break through bullish resistance
• Indicates upward acceleration at the end of a
  strong move
• Break of support should have more validity
• Declining Trendlines seen as the exact opposite
  of Rising Trendlines
• Break of trendline resistance aka Bearish
  Reversal Pattern

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Figure 16.17 16.18
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Other Patterns

• Three other patterns of note
• Catapult
• Spike aka Long Tail
• Shakeout
• Catapult
• A confirming pattern
• Results in a pullback or throwback following the
  breakout from a Triple Top or Triple Bottom
• Combination of a Double and Triple Top
• Powerful Pattern which allows for favourable
  entry
• Buy 50 on a pullback, stops below the base of
  the formation, add on a move to new extremes

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Figure 16.19
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Other Patterns - continued

• Spike aka Long Tail
• A reversal in trend following a trend
  acceleration
• How does one define a an acceleration worth of
  fading?
• Most practitioners 17-20
• (Blumenthal argued 20 boxes, Burke 17-20, Dorsey
  20 boxes)
• Buy on a confirmed reversal

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Figure 16.20
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Other Patterns - continued

• Shakeout
• Capitalizes on traders and investors who sell on
  the first sign of difficulty following an uptrend
• Criteria
• Strong uptrend
• A Double Bottom formed by 2 columns of Os
• A breakdown through the Double Bottom
• Must occur early in a strong uptrend
• Buy the reversal
• Additional Rules
• The market in question must be in an uptrend
• The market should be above bullish support line
• The stock must form two tops at the same price
• The reversal from these tops gives a Double
  Bottom sell signal
• The sell signal is the first that has occurred
• Must be showing positive relative strength or be
  in an uptrend

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Figure 16.21
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Traps

• A pattern completes as expected, but then
  reverses and breaks out to the other side
• Bull Trap
• Bear Trap
• See page 146 for real life examples in the FTSE

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Chapter 6 Point and Figure Charts of Indicators

• Advantage of PF charts on oscillators is to act
  as a filter
• Not as useful for indicators that have been
  smoothed
• Most useful on three types of indicators
• Relative Strength which shows trend of relative
  outperformance
• Scaling is irrelevant,
• PF allows for objective trend definition using
  the 45 degree trendline
• Should use log scale 1 boxes
• Cumulative lines like On Balance Volume
• Values are arbitrary
• Identifies the trend in OBV through 45 degree
  lines
• Clarifies areas of accumulation and distribution
• Use arithmetic box which is 1 of OBV range
• Oscillators like RSI and Momentum
• Gives cleaner signals and acts as a filter for
  trend determination
• 45 degree lines

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Chapter 7 Optimization

• Helps with decision about box an reversal size
• Ideal situation is to give you are range of
  values
• Can tell you whether close only or H/L
  construction is preferable
• Optimization only of value with 3 box reversal
  charts b/c signals are unambiguous
• Percentage box sizes should be used
• Optimization is not the Holy Grail
• Can only offer a starting point for box and
  reversal sizes pattern probabilities after that
  subjective analysis takes over
• When employing optimization rules must be
  specific

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Chapter 8 Point and Figure Contribution to
Market Breadth

• Bullish Percent
• Measures the percent of (equity) index components
  showing bullish PF patterns, specifically Double
  Tops constructed from 3-box reversal price charts
• Use only log scale charts of index constituents
• Bullish patterns remain until they are reversed
  by a bearish pattern
• Caveat index components change over time, use
  larger indices
• Performs 2 tasks
• Indicates how overbought the market is
• Flashes signals to accumulate or dispose stocks
• Analysis
• 70 means overbought, 30 means oversold, upward
  bias of equity markets indicates that readings
  are not symmetrical
• 50 line is the critical point, Use a 2.5 band
  around the 50 level
• Line charts can be overlaid against price, used
  like other indicators
• Most useful with divergences
• Point and Figure has two advantages
• Double Top and Double Bottom signals apply
• Last column tells you the status of the market
• Column of Xs is bullish
• Column of Os is bearish
• More useful than line chart b/c of Filter
  Percentage box sizes should be used

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Chapter 9 Advanced PF Technicques

• Moving Averages
• Calculated by taking actual or calculated center
  of each column
• Decide on column amount, sum and divide
• Main purpose is to define trend
• Dual MA cross-over technique using adjacent
  fibos
• Take signals with the trend, exit positions on
  signals against the trend
• With 1 box charts, averages need to be lengthened
• When using single moving averages, use a longer
  period MA and signals are generated when prices
  crosses through the average
• Example Double Top buy occurs when both Xs are
  above the MA
• Parabolic Stop and Reverse
• Created by Welles Wilder
• Trend following technique with an acceleration
  factor
• Used to identify and trade with the trend
• Two types of signals price pattern or
  immediately following a SAR
• Use a slower acceleration factor for a 1 box
  chart as the congestion patterns are wider
• Better than 45 degree lines in defining trailing
  stops in a sharp trend
• Bollinger Bands
• Two primary uses
• Identify overbought and oversold