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Technical Analysis Explained: Point & Figure Charts

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Technical Analysis Explained: Point & Figure Charts

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  1. Technical Analysis Explained: Point & Figure Charts Shaun van den Berg Head of Client Education Wednesday, 29th May 2013

  2. Agenda • Introduction to Point & Figure Charts • Constructing a Point & Figure Chart • Point & Figure Chart Formations • Trend Lines • Determination of Price Objectives • Upcoming Webinars • Summary & Conclusion

  3. Refer to Online Tutorial #10 Points & Figure Charts Step 1 Select Resources Step 2 Select Tutorials Step 3 Select Tutorial #10

  4. Introduction to Point & Figure Charts Price charts

  5. Introduction to Point & Figure Charts • One of the oldest charting techniques/ styles in existence • P & F charts been around for at least 100 years • First method of technical analysis used to track share prices. • Clearest & most unequivocal form of technical analysis. • Graphical depiction of supply & demand • Closing line charts & Bar charts are three dimensional: • Price • Time • Volume • P&F charts are one dimensional – Price only

  6. Price Charts: Closing Line Chart Price Time

  7. Price Charts: Bar & Volume Chart High Close Price Open Low Volume Time

  8. Price Charts: Support & Resistance Resistance Support

  9. Price Chart: Point & Figure Chart Price

  10. Constructing a Point and Figure Chart • The chart is constructed using vertical rows of X’s & O’s to indicate rises & falls in the share price respectively. • When the price of a share goes up, the price rise is indicated by a vertical row of X’s. • If the share price of ABC Ltd goes up from 10c to 70c, the rise in price will be indicated by a vertical row of X’s.

  11. Constructing a Point and Figure Chart • When the price of a share goes down, the price fall is indicated by a vertical row of O’s. • If the share price of ABC Ltd declines to 40c, the drop in price will be indicated by a vertical row of O’s in the next column (the column immediately to the right) • As prices move up & down, the chart will plot the extent of each move. • It is therefore important to be able to draw a distinction between a continuation of a current trend, and the beginning of a new trend.

  12. Constructing a Point and Figure Chart • We would call the point & figure charts in our examples “10 x 3” charts. • The “10” representing the price change represented by each block (10c). The Box Size is amount the price must move before a new X or O can be drawn on the chart. EG, 5c move is ignored, • The “3” representing the fact that it is a 3-point reversal chart. Reversal amount is how many boxes the price must move against the current direction to trigger a reversal. EG, 3 x 10c = 30c

  13. Advantages of Point & Figure Charts • Nature of price movement - As prices move up & down, the chart will plot the extent of each move. • Support & Resistance - By watching for places where the prices repeatedly reverse, levels of support & resistance can be identified. • Consolidation - Generally used to identify periods of consolidation - Breakouts. • Price Objectives – Used to calculate price objectives based on chart formations.

  14. Disadvantages of Point & Figure Charts • Log Scaling - Difficult to construct - Squares at the top become too small. • Arithmetic chart is usually used – Compensate by progressively altering the scale • Assign a value of 2c per block between 0c and 100c, • 5c per block between 100c and 300c, • 10c per block between 300c and 600c. • Volume - Do not account for the volume on which the price changes occur. • Volatility - Non-volatile shares (i.e. very little price fluctuation) result in very little alteration. • The more volatile the share, the more useful the point and figure chart. • Time Dimension – Reference to time is recorded by substituting the “X” or “O” symbol representing the first recorded price change in the particular month, with the number of the month (1 - 12).

  15. Technical Analysis Explained: Point & Figure Charts

  16. Point & Figure Charts: Formations The Double Top Formation The Bullish Signal Formation Variations on the Double Top Formation The Triple Top Formation The Bullish Symmetrical Triangle Formation Formations in Combinations Variations on the Triple Top Formation The Broadening Formation Bullish Catapult Formation Bullish Signal Reversed Formation The Double Bottom Formation The Bearish Signal Formation Variations on the Double Bottom Formation The Triple Bottom Formation The Bearish Symmetrical Triangle Formation Formations in Combinations Variations on the Triple Bottom Formation The Broadening Formation Bearish Catapult Formation Bearish Signal Reversed Formation.

  17. P & F Charts – Double Top • Basic chart pattern in a bull market - Consists of three vertical columns. • Impossible to have a chart pattern with less than three columns. • All other chart patterns are derivations from & combinations of basic pattern. • Double top is defined as a column of X’s rising to the same level as the previous column of X’s & then exceeding it. • Bullish signal as the prices have just broken a level of resistance. • Implication is that prices should continue moving upward. • This signal is quiet common & does not always yield good results. • The trader has a choice to act on the original breakout or on those occurring later in more complex formations.

  18. P & F Charts – Double Top • First top at 29c. • Followed by a decline to 26c • Followed by a rally to 29c. • The two tops at 29c comprise the double top. • A breakout above this double top registers a buy signal.

  19. P & F Charts – Double Bottom • This is the basic chart pattern in a bear market. • Basic formation consists of three vertical columns. • All other patterns are derivations from & combinations of this basic pattern. • Double bottom defined as a column of falling O’s to the same level as the previous column of O’s & then drops lower. • Bearish signal – Prices have broken below a support level. • Implication is that prices should continue falling. • Very common & does not always signal good trades. • Traders should not ignore this chart pattern – Look for confirmation signals • Have a choice to act on the original breakout or on those occurring later in more complex formations.

  20. P & F Charts – Double Bottom • First bottom at 27c. • Followed by a rally to 30c • A decline to 27c. • The two bottoms at 27c comprise the double bottom. • A breakout below this double bottom to 26c registers a sell signal

  21. P & F Charts – Bullish Signal • This is one of two classic patterns used in timing a share purchase. • Special form of the Double-Top pattern – Additional confirmation. • Significant feature - A higher bottom followed by a higher top. • As long as a share continues to make higher bottoms & higher tops, it is considered bullish. • The first time it makes a higher top after making a higher bottom is the signal that the share may be bought. • Demand has overcome Supply • Untilnow been bearish - Ready to make its upward move. • Accumulation by those in the know has been completed. • Implication – Prices should continue rising. • Four vertical columns are required for the Bullish Signal Formation. • Fairly common pattern / Better signal than normal Double Top

  22. P & F Charts – Bullish Signal We have a bottom at 25c & then a higher bottom at 29c. We also see a first top at 32c & then a higher top at 33c. The higher top at 33c is the signal that the share may be bought. The buy signal takes place at a higher level than in example A, although both chart patterns start with a bottom at 25c. We have a bottom at 25c & then a higher bottom at 27c. It also has one top at 31c and then a higher top 32c. When the higher top is made at 32c, the share has made an upside breakout & has given a buy signal. The letter B indicates the buy signal.

  23. P & F Charts – Bearish Signal • This is one of two classic patterns used in timing a share purchase. • Special form of Double-Bottom pattern – Additional confirmation • Significant feature - Lower top followed by a lower bottom. • Second column of X’s must not rise as high as the previous column of X’s. • As long as a share continues to make lower tops & lower bottoms, it is considered bearish. • The first time it makes a lower bottom after making a lower top is the signal that the share may be sold. • Supply has overcome Demand • The share may have been bullish & in an uptrend • Now ready to make a downward move. • Distribution by those in the know has been completed. • Four vertical columns are required.

  24. We have a top at 33c & then a lower top at 30c. We also see a first bottom at 27c & then a lower bottom at 26c. The lower bottom at 26c is the signal that the share may be sold. The sell signal takes place at a lower level than in example A, although both chart patterns started from the same high at 33c. P & F Charts – Bearish Signal We have a top at 33c & then a lower top at 31c. It also has one bottom at 28c & then a lower bottom 27c. When the lower bottom is made at 27c, the share has made a downside breakout & has given a sell signal. The letter S indicates the sell signal.

  25. P & F Charts - Variations of the Double Top & Bottom Formation • The breakout takes place after two bottoms/ tops have been made • Same level instead of merely one bottom / top. • The first bottom / top is re-tested & held. • Then comes the rally / correction for the breakout. • More common than a straight-up or down move from a single bottom / top. • Pattern usually appears at market bottoms / tops. • Four vertical columns are required for their completion. • Appears as integral part of more complex formations • Trader has the choice of acting on these breakouts or later breakouts on more complex formations.

  26. P & F Charts - Variations of the Double Top & Bottom Formation The breakout at 28c takes place after two tops has been made at the same level instead of merely one top. The first top at 32c was re-tested & held. Then came the decline for the breakout on the Double Bottom formation The breakout at 29c takes place after two bottoms have been made at the same level instead of merely one bottom. The first bottom at 25c was re-tested & held. Then came the rally for the breakout on the Double Top formation.

  27. P & F Charts – Triple Top Formation • Second of the two classic chart patterns • Used for timing a share purchase. • Unlike the Bullish Signal formation, it is only the action of the share at previous tops that is important, not the bottoms. • No higher bottoms are necessary in this formation. • This formation must have a minimum of five vertical columns. • All that is necessary is the penetration of two previous tops. • The last three columns of X’s are examined. • The first & second must rise to the same point & the third must extend past them. • The penetration of two previous tops by a third top compensates for the chart formation having no higher bottom. • Strong buy signal as the resistance level is more firmly established. • The more strongly the resistance level – the more significant is the breakout

  28. P & F Charts – Triple Top Formation We see a base of accumulation between 5c & 20c. There are two level tops at 20c. The buy signal was given when these two tops had been penetrated. At this point Demand has overcome Supply & the extension of the up move is to be expected.   We have a base of accumulation between 5c & 25c. The first top is at 25c & the second top is at 20c. The buy signal was given at 30c when these two tops had been exceeded.

  29. P & F Charts – Triple Bottom Formation • Second of two classic chart patterns used in timing a share sale. • Unlike the Bearish Signal formation, it is only the action of the share at previous bottoms that is important, not the tops. • No lower tops are necessary in this formation. • All that is necessary is the penetration of two previous bottoms. • This formation must have a minimum of five vertical columns. • The last three columns of O’s are examined. • The first & second must find support at the same level & the third must move further downward. • Strong sell signal as the supportlevel is more firmly established. • The penetration of two previous bottoms by a third bottom compensates for the fact that the chart formation has no lower tops.

  30. P & F Charts – Triple Bottom Formation We see a top distribution between 45c & 42c. There are two level tops at 45c. The sell signal was given at 41c when these two bottoms had been penetrated. At this point Supply has overcome Demand and an extension of the down move is to be expected. We a have a top of distribution between 45c a& 41c. The first bottom is at 41c & the second bottom is at 42c. The sell signal was given at 40c when these two bottoms had been exceeded.

  31. P & F Charts – Variations on the Triple Top • Example A - shows the upside penetration of not merely 3 tops but 4 tops. • Sometimes you may find penetrations of five or more tops. • From a timing point of view, this has no more significance than the penetration of merely three tops. • The share cannot be bought until the penetration occurs & it occurs at the same point no matter how many previous tops are penetrated. • The difference in the formation is important when trying to estimate the extent of the subsequent move or price projection • Since we have more vertical columns in this variation of the Triple Top formation, any horizontal count across the formation will necessarily show a greater potential up move.

  32. P & F Charts – Variations on the Triple Top • We see the upside penetration of not merely 3 tops but 4 tops. • From a timing point of view, this has no more significance than the penetration of merely three tops. • The share cannot be bought until the penetration occurs • It occurs at the same point no matter how many previous tops are penetrated.

  33. P & F Charts – Variations on the Triple Top • Example B shows a Triple Top formation with a long “tail” down. • Note the down move in the fourth vertical column before the final up move in the fifth column to give the buy signal on the penetration of the Triple Top Formation. • Occurs frequently in chart patterns. • It is an unusually strong formation. • The reason for this is that what at first appears to be a heavy overhanging supply of shares (between 25c and 45c) was actually not so.

  34. P & F Charts – Variations on the Triple Bottom • Example A shows the penetration of not merely 3 bottoms, but 4 bottoms. • From a timing point of view, this has no more significance than the penetration of merely three bottoms. • The share cannot be sold until the penetration occurs • It occurs at the same point no matter how many previous bottoms are penetrated.

  35. P & F Charts – Variations on the Triple Bottom • Example B shows a Triple Bottom formation with a long “tail” up. • Note the up move in the fourth vertical column before the final down move in the fifth column to give the sell signal on the penetration of the Triple Bottom Formation. • This formation also occurs frequently in chart patterns. • It is an unusually strong formation. • The reason for this is that what at first appears to be heavy demand for shares (between 38c and 41c) was actually not so.

  36. P & F Charts – Formations in Combinations • Bullish Signal Formation & the Triple Top Formation combined into one. • Higher bottoms & higher tops • Penetration of three tops. • Occurs less frequently than either of the two separately • When it does occur it is usually a very strong buy signal. • This formation is profitable 79.5% of the time • Average gain of 36%. • The average time for such gain is 8-months. • A minimum of five vertical columns is necessary.

  37. P & F Charts – Formations in Combinations • We have an illustration of both the Bullish Signal Formation & the Triple Top Formation combined into one. • Higher bottoms & higher tops • Penetration of three tops. • The buy signal which takes place at 36c (indicated by the letter B) is both a buy signal on Bullish Signal Formation and a Triple Top Formation.

  38. P & F Charts – Formations in Combinations • We have an illustration of both the Bearish Signal Formation & the Triple Bottom Formation combined into one. • Lower tops & lower bottoms • Penetration of three bottoms. • The sell signal takes place at 32c (indicated by the letter S). • Occurs less frequently than either of the two separately • When it does occur it is usually a very strong sell signal. • A minimum of five vertical columns is necessary for its completion.

  39. P & F Charts – The Bullish Broadening Formation • This chart pattern is actually a Triple Top formation. • We have the penetration of three tops with the buy signal at 50c. • Certain characteristics that singles it out for special attention. • The breakthrough on the Triple Top takes place as follows: • We have the first top at 40c. • Then we have first bottom at 25c. • The second top takes place at 45c, at a higher level than the first top. • The second bottom takes place at 20c, at a lower level than the first bottom. • Finally we have the breakout at a higher top at 50c.

  40. P & F Charts – The Bearish Broadening Formation • We have the same broadening type of formation with the breakout on the downside. • It goes from a bottom at 40c to 75c, then a lower bottom at 30c & a higher top at 55c. • It finally breaks-down on the third lower bottom at 20c. • This bearish formation occurs infrequently that it is not worthwhile looking for. • In a bear market, the ordinary Triple Bottom formation serves the purpose very well. • The best of the Triple Bottom formations are the ones with the long “tail” up.

  41. P & F Charts – Bullish & Bearish Symmetrical Triangles • Requires a minimum of five vertical columns but can be longer • Basically a mere variation of Bullish Signal Formation. • Consists of both X & O columns shrinking until prices finally breakout - Higher bottoms & lower tops • Profitable 71.4% of the time for an average gain of 30.9%. • Average time for the gain is 5.4 months.

  42. P & F Charts – Bullish Symmetrical Triangle First note the standard Bullish Signal Formation of higher bottoms and lower tops. We see a bottom at 31c & then a higher bottom at 33c. We see a top at 36c & then a higher top at 37c. This higher top at 37c, indicated by the letter B, gives us the buy signal. The additional factor that makes a triangle out of this formation is the top at 38c & the lower top at 36c. When trend lines are drawn from the bottom at 30c& from the top at 38c, they form a symmetrical triangle.

  43. P & F Charts – Bearish Symmetrical Triangles Note: We have a regular Bearish Signal Formation of lower tops and higher bottoms. We have a top at 38c then a lower top of 36c. We have a bottom at 33c then a lower bottom at 32c. The lower bottom at 32c gives us the sell signal & is indicated by the letter S. The feature that makes this formation a triangle is the bottom at 31c & the higher bottom at 33c. If trend lines are drawn from the bottom of 31c & the top of 38c, they form a symmetrical triangle.

  44. P & F Charts – Bullish Catapult Formation The Bullish Catapult Formation (example A) starts with the classical Triple Top Formation. Note the original buy signal at 34c on a Triple Top formation. Instead of proceeding straight upwards, it only rallied to 35c & then pulled back three points. The share then proceeded to rally once more & exceeded its previous high at 36c. When it does this, it registers a new buy signal at 36c (indicated by the letter B).

  45. P & F Charts –Bearish Catapult Formation This is an illustration of the Bearish Catapult Formation, which starts with the classical Triple Bottom Formation. Note the original sell signal at 34c on a Triple Bottom formation. Instead of proceeding straight downwards, it only declines to 33c & then pulled back three points. The share then proceeded to decline once more & penetrated its previous bottom at 33c. When it does this, it registers a new sell signal at 32c (indicated by the letter S).

  46. P & F Charts – Bullish Signal Reversed Formation This pattern starts with a perfect Bearish Signal Formation. Instead of consisting of merely four vertical columns, it contains seven vertical columns. The first six columns gave us the classic pattern of lower tops & lower bottoms. The seventh column, however, shows a price reversal by a steady influx of demand without forming any sort of a base of accumulation. Because of this unexpected reversal, the buy signal takes place at 42c, the first time the price penetrated a previous top. The momentum of this straight upward reversal in the seventh column usually carries far enough in the same direction to yield a substantial profit. This formation usually proves most profitable. It does not occur too often, but it should be taken advantage of when it does happen.

  47. P & F Charts – Bearish Signal Reversed Formation This pattern starts with a perfect Bullish Signal Formation. Instead of consisting of four vertical columns, it contains seven vertical columns. (Longest pattern – combination of 4 separate patterns) The first six columns gave us the classic pattern of higher bottoms & higher tops. The seventh column, shows a price reversal by a steady influx of supply without first forming a top of distribution. Because of this unexpected reversal, the sell signal takes place at 39c, the first time the price penetrated a previous bottom.

  48. Technical Analysis Explained: Point & Figure Charts Point & Figure Trend lines

  49. Point & Figure Trend Lines • Trend lines are a standard feature of technical analysis. • Identify trends & highlight support & resistance levels. • Bar charts - Trend lines are drawn between any two points. • P & F charts only use flat horizontal lines & 45 degree trend lines. • Trend lines are drawn by picking a peak (high) or trough (low) • Line is started in the middle of the box just above or below that column. • Next point is found by moving over one column & up or down one box. • The trend line is then drawn connecting these two points. • This process is repeated for as many columns as the line is desired. • Matching or parallel trend lines are usually drawn on the opposite side of the column. • When prices break out through a trend line, a new trend is established & the trend lines are redrawn to reflect new trend. • Short-term trend & long-term trend from the trend lines.

  50. P & F Charts – Bullish Support Lines The chart shows a low of 31c with the first buy signal at 40c on a Double Top Formation & its second at 45c on a Bullish Signal Formation. A Bullish Support Line may now be drawn - Indicated by the broken line on the chart. It is drawn from the square below the low & is extended as far to the right as the chart will allow. The trend line does not connect points - It is a line drawn from the lowest point made after the completion of a bear market or a significant down move. It intersects successive ascending corners of the squares on the chart.