Simple Buy and Simple Sell formations
Simple BuyXXXX OXX O XO
Simple SellBuy
Sell
XO X OO X OOOO
Simple Buy
The Simple Buy formation (or Double Top), as shown in the figure above, occurs when thecurrent X column rises one box higher than the top X in the prior column of Xs. The simple buy
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Interpreting the Charts
formation is more than an entry point for a long position. It also represents the price at whichany short position in the contract should be covered. Thus, the simple buy formation is both:1.2.
an entry signal for longs, and astop-loss point for shorts.
Simple Sell
The other basic formation is the Simple Sell (or Double Bottom). It is composed of two columnsof Os and one intervening column of Xs and occurs when the current column of Os falls onebox below the lowest O of the prior column. An example of this type of formation is alsohighlighted in the FTSE chart (2.1) on page 59, coloured red on the third column. The simplesell formation signals two market strategies:1.2.
to liquidate long positions, providing guidance for the placing of stop-loss orders, and toshort the security.
Point-and-figure signals in the framework of market psychology
Technical analysis like the one based on point-and-figure charts follows the argument that theprice is always right, and therefore that past price movements have to be analysed in order toforecast future price moves. Neither market sentiment, nor different market players’ needs andtheir strategies, are considered.The reasons, however, that point-and-figure signals work are easily discovered in the frameworkof market psychology and market structure. Prices of individual stocks are a function of themarket view and the portfolio constraints of many professional and private speculators, tradersand investors. They all know that prices fluctuate around a trend or drift. Therefore theycontinuously scrutinize the markets for trend changes, trading ranges or breakouts fromprevious trading ranges.The simple buy signal works because it represents the move – whether coincidental or drivenby insiders – towards new highs, a retracement and a rise above the old high. Such price action,which is typical and frequent in securities markets, is observed by many market participants,attracts their interest and therefore increases demand. Moreover, short sellers usually cover theirshort positions in this situation which increases demand further. All the above events trigger achain reaction which leads the price towards higher levels and is the market behavioral reasonwhy the simple buy works.The simple sell is a down move that stops, rebounds and then turns down again. Marketparticipants with long positions reason that the rebound had no staying power and therefore thestock is weak. This convinces them to liquidate all or some of their positions which results inan increase of supply. If this happens – as it normally does – the additional supply accelerates57
The Complete Guide to Point-and-Figure Charting
the down move of the stock because more investors liquidate and short-sellers enter the scene.The down move continues to the point where market participants feel that the stock is cheap andthey start buying. A bottom formation is created and eventually a simple buy signal occurs.
‘Bullish’ and ‘bearish’ p&f chartsIf the last signal on a chart is a buy, the chart is described as bullish, whereas if the lastsignal is a sell, it is described as bearish. This again is a very practical feature of pointand-figure, which allows you to automatically classify markets into bullish and bearishphases based on very clear rules. At any one moment, every chart is either bearish orbullish. No guessing required and no fuzziness.
Examples: Simple Buy and Simple Sell
On the next two pages we have reproduced p&f charts of the FTSE Index [.FTSE] and GallagherGroup [GLH.L]. One goes south, the other north.On both you see a series of simple sells and buys. On both charts we have selected only the mostinstructive simple buys and simple sells. As usual we highlight the buys with green and the sellswith red. Again, if you are new to point-and-figure charting, don’t be confused by the monthcodes (numbers). They are often used in place of Xs and Os to show the beginning of a newmonth, but are not mandatory.You might like to compare the Charts 2.1 and 2.2 with more familiar bar charts of the same data.
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Interpreting the Charts
Chart 2.1 – FTSE [.FTSE]
FTSE / 3 box / 2000.01.04 to 2003.01.107050 ....|................................|.............................|..... 70506900 ....|................................|.............................|..... 69006750 _X_9_____________________________________________________________________ 67506600 1X4XO................................|.............................|..... 66006450 OXO6O................................|.............................|..... 64506300 OXOXO................................|.............................|..... 63006150 23OXO................................|.............................|..... 61506000 O_OX2____________________________________________________________________ 60005940 ..O.O....X.X.X.X.....................|.............................|..... 59405880 ....3....X5XOXOXO....................|.............................|..... 58805820 ....O....XOXOXO6O....................|.............................|..... 58205760 ....O....XO.OXO.O....................|.............................|..... 57605700 ____OX_X_X__O___OX_______________________________________________________ 57005640 ....OXOXOX......OXOX.................|.............................|..... 56405580 ....OXOXOX......O7O8O................|.............................|..... 55805520 ....O.OXOX......O.OXO................|.............................|..... 55205460 ....|.OX4X........OXO................|.............................|..... 54605400 ______OXO.________OXO______________X_____________________________________ 54005340 ....|.OX..........OXO............X.XOX.............................|..... 53405280 ....|.O...........O.9..........X.XOXO1O..X.X.......................|..... 52805220 ....|...............O......X.X.XOXOCOXOX.X5XO......................|..... 52205160 ....|...............O......XOXOXOXO.OXOXOXOXO......................|..... 51605100 ____________________O______XOXOXO___OXOXO3O_O____________________________ 51005040 ....|...............O......XO.OB....O|2.O...O......................|..... 50404980 ....|...............O......X..O......|......6......................|..... 49804920 ....|...............OX...X.X.........|......O......................|..... 49204860 ....|...............OXOX.XAX.........|......O......................|..... 48604800 ____________________OXOXOXOX________________O____________________________ 48004740 ....|...............OXOXOXO..........|......O......................|..... 47404680 ....|...............O.O.OX...........|......OX.....................|..... 46804620 ....|...................OX...........|......OXOX...................|..... 46204560 ....|...................OX...........|......O7OXO..................|..... 45604500 ________________________OX__________._______O_OXO________________________ 45004440 ....|...................OX...........|........O.O....X.............|..... 44404380 ....|...................OX...........|..........O....XO............|..... 43804320 ....|...................OX...........|..........O....XO............|..... 43204260 ....|...................O............|..........OX.X.XO............|..... 42604200 ________________________________________________OXOX8XOX_________X_______ 42004140 ....|................................|..........OXOXOX9XOX.....X.XC|..... 41404080 ....|................................|..........OXOXOXOXOXO....XOXO|..... 40804020 ....|................................|..........OXOXOXOXOXO....XOBOX..... 40203960 ....|................................|..........OXOXO.O.O.O..X.XO.OX..... 39603900 ________________________________________________O_OX______OX_XOX__O1_____ 39003840 ....|................................|............OX......OXOXOX..O|..... 38403780 ....|................................|............OX......OXOAOX...|..... 37803720 ....|................................|............OX......OXO.O....|..... 37203660 ....|................................|............O.......O........|..... 36603600 ----0--------------------------------0-----------------------------0----- 36003540 ----1--------------------------------2--------------------.--------3----- 3540
Note that all three of the highlighted sell signals on the FTSE chart are precursors of importantdown moves.
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The Complete Guide to Point-and-Figure Charting
Chart 2.2 – Gallaher Group [GLH.L]
730720710700690680670660650640630620610600590580570560550540530520510500490480470460450440430420410200195
...........|..................................................|........................X.....X...................|......................X.XO....XO.......__________________________________XOXO____XO_______...........|......X...........X.X.XOXO....XO..................|......XO..........9OXOXO.O....XO..................|......XO........X.XOXOX..O..X.XO..X...............|......XO........XOXOXO...O..XOXOX.XO...________________X_XOX_______XOXOX____O__XOXOXOXO___...........|....X6XOXO......XOXOX....OX.XOXOXOXO..............|..X.XOXOXO....X.XOXOX....OXOXO.OBO.O..............|..XOXO.OXO....X8XO.O.....OAOX..O...O..X...........|..XOX..O7O....XOX........O.O.......OX.X______________5O___O_O____XO___________________OXOX...........|..X......OX...X....................OXOX...........|..X......OXO..X....................OXO............|..X......OXO..X....................OX.............|..4......O.OX.X....................OC..______________X________OXOX____________________O___...........|..X........OXOX...................................|..X........OXO....................................|..X........O......................................|2.X....................................X___________X3X____________________________________XO........X|XOX....................................XO..B.....X1XO.....................................9OA.XOX...XOX.......................................OXOXOXOX.XOX......................................_OXOXOXOXOXOX______________________________________.OXOXOXOCOXO........................................OXOXO.O.O.|........................................O.O.......|..................................................|.......................................-----------0-------------------------------------------------2---------------------------------------
730720710700690680670660650640630620610600590580570560550540530520510500490480470460450440430420410200195
This chart includes various buy signals. The two which are marked are simple buys – the X ishigher than the X on the previous X column – and again the chart shows nicely how they heraldbullish moves.
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Interpreting the Charts
To reiterate what was said on page 58:With point-and-figure the chart is either bullish or bearish. It is never neutral.•
If the last signal was a buy signal, the stock is bullish. If you like the stock, you wouldbuy it, thus going long. If you do not like it, you would not hold a position – and wouldhave covered any short position.
•
Conversely, if the last signal was a sell signal, the stock is bearish. No matter how muchyou like the security, you should liquidate any long position. If you believe the stock isweak, you would go short.
Therefore your decisions are simple:•
When a buy signal occurs (the security becomes bullish), you cover all shorts and golong (if you like the stock), or stay out of the security; and
•
When a sell signal occurs ( the security becomes bearish), you liquidate all long positionsand go short (if you believe it is weak), or stay out totally.
Depending on your view of the security, you may decide not to be in a position. But if youchoose to have a stake, only go long of bullish stocks (those with the most recent signal was abuy) and short bearish ones (where the last signal was a sell).If you have a position, you always close it when an opposite signal occurs. This closing ofpositions is a required discipline of point-and-figure trading. It is very important and anenormous help for traders who would otherwise often fail to cut losses or take profits at the righttime.
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The Complete Guide to Point-and-Figure Charting
Summary
Name of signal
Indicated by
Action
Simple Buy
Higher X than highest X onnearest X column to the left.
Always cover shorts, then golong or stay out.
Simple Sell
Lower O than lowest O onnearest O column to the left.
Always sell longs, then goshort or stay out.
=====Why the P&F chart is never neutral, and never ambiguous
A p&f chart always includes a clearly distinguishable most recent signal, either bullish orbearish. Neutral signals don’t exist.The p&f chart is bullish, if the most recent, or last, signal was a buy and is bearish if the mostrecent signal was a sell.Therefore, a p&f chart is bullish or bearish, never neutral or fuzzy – which makes themcompletely different from brokers’ recommendations: hold, buy, strong buy, very strong buy,sell, coverage ceased! For example, the FTSE chart on page 59 is bearish, as the last signal issell, generated on the second last column.
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Interpreting the Charts
Complex buy and sell formationsAlthough the simple buy and simple sell formations discussed above are the basic patterns uponwhich p&f trading is built, their brief formulation and simplicity often hides information whichis evident in more complex patterns. For this reason a number of other, more complex, patterns,all using the simple patterns as a necessary element, have been developed to provide the mostrealistic picture of past price action and the best possible prediction of future price movement.Filtering the many signals
There is another reason for the development and use of more complex patterns. They can serveas an effective screen or filter for trading where investment capital is limited.Since all patterns contain a simple signal, to trade on all simple patterns would require aconsiderably larger capital commitment than if you restrict your trades to occurrences of aspecific complex formation. For instance, a trader taking only signals generated by a Triple Topformation, one of the eight buy signals, would be trading only 15.3% of all buy signals (aresearch finding of R. E. Davis) as defined by simple formations.There are eight buy and eight sell signals, including the basic Simple Buy and Simple Sell, thatwe consider useful. They are summarised in the table overleaf. Before looking at them, you maywant to remind yourself of the basic signals:Figure 2.2 – Reminder of the two basic signals, Simple Buy and Simple Sell
Simple BuyXXXX OXX O XO
Simple SellBuy
Sell
XO X OO X OOOO
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The Complete Guide to Point-and-Figure Charting
Table 2.1 – Point-and-figure buy and sell formations
BUY SIGNALS
SELL SIGNALS
B-1
Simple Bullish Buy (or Double Top)
S-1
Simple Bearish Sell (or Double Bottom)
B-2
Simple Bullish Buy with a RisingBottom
S-2
Simple Bearish Sell with a DecliningTop
B-3
Breakout of a Triple Top
S-3
Breakout of a Triple Bottom
B-4
Ascending Triple Top
S-4
Descending Triple Bottom
B-5
Spread Triple Top
S-5
Spread Triple Bottom
B-6
Upside Breakout above a BullishTriangle
S-6
Downside Breakout of a BearishTriangle
B-7
Upside Breakout above a BullishResistance Line
S-7
Downside Breakout Below a BullishSupport Line
B-8
Upside Breakout above a BearishResistance Line
S-8
Downside Breakout below aBearish Support Line
The remainder of this chapter is devoted to these sixteen formations.The symbols used for the signals, B-1 to S-8, are taken from the Davis Study. We describe thisstudy in detail in Chapter 5, but at this point it is worth noting its status as the first rigorousacademic study of the profitability of point-and-figure. R.E. Davis, who was professor ofchemistry at Purdue University, researched the frequency of occurrence of the 16 complex p&fsignals listed above, based on a large sample of US stocks and over a long time period. Theinteresting findings are reproduced in the table opposite.
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Interpreting the Charts
Table 2.2 – The Davis Study - frequency of buy and sell formations
Buys
Freq in %
Sells
Freq in %
B1
12.8
S1
13.5
B2
56.9
S2
56.4
B3
15.3
S3
15.5
B4
6.6
S4
8.4
B5
2.4
S5
1.6
B6
1.2
S6
2.6
B7
3.9
S7
1.4
B8
0.799.8
99.4
Non-standard complex signals
As happens in all technical analysis, several chartists have developed a myriad of differentpoint-and-figure signals and they also combine them with various other indicators. Often they –the signals – have strange names, such as the descending long tail trampoline or the like, andoccur once in a lifetime. We firmly believe that it is much more profitable to stick with the basicsignals and that it is dangerous to complicate or confuse the trading process.The buy signals
We use the same format to picture the eight basic buy signals as we use throughout the book tochart the different stocks. Please note that there are trend lines used in the three last signals.We’ll come back to the subject of trend lines in a later chapter. But for the moment keep in mindthat trend lines are used to signal certain patterns such as supports and resistances, are alwaysdrawn in 45 degree angles and marked with ‘+’.65
The Complete Guide to Point-and-Figure Charting
B-1 – Simple Bullish Buy signal (or Double Top)
The most basic of all signals is the Simple BullishBuy signal, sometimes called the Double Topformation. It is formed by a column of Xs, then acolumn of Os, then a column of Xs, which risesone box above the prior column of Xs. This is theSimple Buy we looked at on page 56.
Figure 2.3
.........................X.............X.X.............XOX.............XOX..............O.......................
B-2 – Simple Bullish Buy with a Rising Bottom
The second formation, the Simple Bullish Buywith a Rising Bottom, is similar to the B-1 in thatthe tops are identical in both cases, meaning thatthe current column of Xs exceeds the top X of theprior X column by one box. But the bottoms ofthe B-1 and B-2 differ. In the case of the SimpleBullish Buy Signal with a Rising Bottom (B-2),the bottom O in the most recent column of Os ishigher than the lowest O of the preceding Ocolumn, a condition not present in the B-1, wherethe lowest O of the most recent column ishorizontal to the lowest O of the prior O column.
Figure 2.4
.........................X.............X.X............OXOX............OXOX............O.O.............O.........................
Having rising bottoms is significant, because it means that support is coming into the market atprogressively higher prices with each decline.
At least one of the Simple Bullish Buy signals, B-1 and B-2, is contained as an element of allof the more complicated buy signals, and when either occurs alone or as an element of a morecomplex formation, all shorts should be covered. Entries on the long side may be made or thetrader may hold off, waiting for a specific and more complex formation to evolve, but all shortpositions must be covered, because the security is now bullish with the degree of bullishnessforecast by the type of formation which ultimately evolves. Because the position is bullish, thereis absolutely no justification for remaining short.66
Interpreting the Charts
B3 – Breakout of a Triple Top
The third formation, but the first of the complexformations, is the Breakout of a Triple Top. It ismade up of five columns, three of Xs and two ofOs. The first two columns of Xs peak at the samelevel, while the current X column rises one boxhigher than the tops of the prior two columns.
Figure 2.5
.........................X...........X.X.X...........XOXOX...........XOXOX...........XO.O............X..........................
B-4 – Ascending Triple Top
The fourth buy signal is the Ascending Triple Topwhich is nothing more than two simple bullishsignals (B-1 and/or B-2) given in succession infive columns. If the bottoms are rising along withthe rising tops, the formation is more bullish thanif the bottoms are horizontal.The Triple Top formation is stronger than eitherof the Simple Bullish Buy Signals, B-1 and B-2,because it represents a breakout of a resistancelevel which held more times than in the simpleformations, and it is considered a complexformation because it contains a simple signal asan element as well as requiring a wider span ofcolumns than either of the simple formations.
Figure 2.6
.........................X.............X.X...........X.XOX...........XOXOX...........XOXO.............O.........................................
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The Complete Guide to Point-and-Figure Charting
B-5 – Spread Triple Top
The Spread Triple Top is the fifth formation. It issimilar to the Breakout of. a Triple Top (B-3)except that it is spread over seven rather than fivecolumns because one rally failed to match orexceed the highs of the prior X columns and itthus takes an additional X column to break thehorizontal resistance.
Figure 2.7
.........................X.........X.X...X.........XOX.XOX.........XOXOXOX..........OXOX..............O.........................................
The next three formations deal with the combined relationship of support and resistance lines tothe height of the tops of X columns and the bottoms of O columns.
B-6 – Upside Breakout above a Bullish Triangle
The sixth formation is the Upside Breakoutabove a Bullish Triangle. This formation iscreated by resistance (supply) coming into themarket at progressively lower levels with eachrally, thus keeping each succeeding column of Xsfrom rising as high as the prior column, whilesupport (demand) comes in at progressivelyhigher levels with each decline as revealed byrising bottoms.The formation is completed and a buy signalgenerated when the upside breakout occurs,meaning that a column of Xs rises one box higherthan the high of the preceding X column. Thetriangle is bullish because the last signal prior tothe start of the triangle was a buy signal.
68
Figure 2.8
................................+.............X+............XO+.X.........XOX+X.........XOXOX.........XOXOX+........XOXO+.......X.XOX+........XOXO+.........XOX+...........O+............+........................
Interpreting the Charts
B-7 – Upside Breakout above a Bullish Resistance Line
The seventh signal is the Upside Breakout abovea Bullish Resistance Line. The resistance line inthis case is drawn as a 45 degree line up and tothe right beginning from the lower right handcorner of the lowest box containing an exposedO, i.e. a O not bordered by an X on its right. Thelonger the resistance line holds, i.e. the morecolumns of Xs that approach the resistance linebut fail to break through, the more bullish theultimate breakout.A breakout is defined as a penetration whichcompletely clears the resistance line and not juststraddles the box through which it crosses. Chart2.3 provides an example of both a straddledposition (not a breakout) and a true breakout.
Figure 2.9
...........................X+..............X..............+X.............+OX........O...+.OX........O..+.XOX........O.+.OXOX........O+.XOXOX........OX.XO.O.........OXOXO...........OXO.............O.O.........................
B-8 – Upside Breakout above a Bearish Resistance Line
In B-7 signals, the security is already bullish andprices have been steadily rising prior to thesignal. But in the eighth formation, an UpsideBreakout above a Bearish Resistance Line, thesecurity is in a steady decline, trading within abearish channel defined by an upper resistanceline and a lower support line both moving down ata 45 degree angle as they extend from left to right.In the B-8, the support line may be well definedor almost non-existent, yet there must be aresistance line declining at a 45 degree angle fromtop left to lower right drawn as the best-fit 45degree line to the declining tops of the X columns.The buy signal occurs when an X column bothbreaks through the resistance line and rises onebox higher than the highest X of the prior column.
Figure 2.10
...................+................X+...............XO+..............XOX+.............XOXO+.X...........OXOX+X...........OXOXOX...........OXOXOX+..........O.O.O..........................
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The Complete Guide to Point-and-Figure Charting
Breaking or straddling of trend lines
In order to illustrate the difference between breaking a trend line and straddling a trend line weuse a 2 year chart of British Telecom [BT.L].Chart 2.3 – BT [BT.L]: touching, straddling and finally breaking of a bearish resistanceBT.L / 3 box rev, classic/ 2001.04.17 to 2003.01.10560 ...+..................................|......................|........550 ___X+_________________________________________________________________540 .X.XO+............+...................|......................|........530 .XOXO.+............+..................|......................|........520 .XO5O..+............+.................|......................|........510 OXOXO...+............+................|......................|........500 OXOXO____+___________X+_______________________________________________490 OXOXOX....+......X...8O+..............|......................|........480 O.OXOXO....+.....XO..XO.+.............|......................|........470 .+O.OXOX....+..X.XOX.XOX.+............|......................|........460 +...OXOXO..X.+.7OXOXOXOXOX+...........|......................|........450 +___O_OXOX_XOX+XOXOXOXOXOXO+__________________________________________440 .+....O.OXOXOXOXO.O.O.O.OXO.+.........|......................|........430 ..+.....O6OXOXOX+.......OXO..+........|......................|........420 ...+....O.O.O.OX.+......O.O...+.......|......................|........410 ....+.........O...+.......9....+......|......................|........400 _____+_____________+______OX____+_____________________________________390 ......+.............+.....OXO....+....|......................|........380 .......+.............+....OXOX.X.X+...|......................|........370 ........+.............+...OXOXOXOXO+..|......................|........360 .........+.............+..OXOXOXOXOX+.|......................|........350 __________+_____________+_OXO_OXOXOXO+________________________________340 ...........+.............+O...OAOXOXO.+......................|........330 ............+.............+...O.OXBXO.|+.....................|........320 .............+.............+....O.OXO.|.+....................|........310 ..............+.............+.....O.O.|..+...................|........300 _______________+_____________+______O_____+.__________________________290 ................+.............+.....O.|....X.................|........280 .................+.............+....OX|3.X.X6................|........270 +.................+.............+...OXOX4XOXO+...............|........260 .+.................+.............+..OCOXOXOXO.+..............|........250 __+_________________+_____________+_O_OXO_OXOX_+._____________________240 ...+.................+.............+..1X..5.OXO.+............|........230 ....+.................+.............+.OX....7XO..+...........|........220 .....+.................+.............+O2....O