Technical Analysis With Point And Figure Charts

At the most basic level, there are four things to look for on a PF chart.

  • Support levels
  • Resistance levels
  • Upward trendlines
  • Downward trendlines

Because of the nature of P&F charts, support and resistance levels are always horizontal lines and trendlines always appear at 45° angles.

Support Levels

Support levels indicate the price at which most investors feel that prices will move higher. There is sufficient demand for a stock to cause a halt in an downward trend and turn the trend up. You can spot support levels on P&F charts by looking for a horizontal row of Os that each mark the bottom of their respective columns.

 
20              
19               
18           X   X 
17       X   X O X O 
16       X O X O X O   
15 O X   X O X O X O X   
14 O X O X O   O X O X O   
13 O X O X     O   O X O X O
12 O X O           O X O X O
11 O X             O   O   O
10 O               + + + + + Support Level     
 

When a support level is penetrated (the price drops below the support level) it often becomes a resistance level; this is because investors want to limit their losses and will sell later, when prices approach the former level.

Resistance Levels

Like support levels, resistance levels are horizontal lines on P&F charts. They mark the upper level for trading, or a price at which sellers typically outnumber buyers. Find them by looking for a row of X’s.

 
20              
19           + + + Resistance level  
18           X   X 
17       X   X O X O 
16       X O X O X O   
15 O X   X O X O X O X   
14 O X O X O   O X O X O   
13 O X O X     O   O X O X O
12 O X O           O X O X O
11 O X             O   O   O
10 O                    
 

When resistance levels are broken, the price moves above the resistance level, and often does so decisively.

Upward Trendlines

To plot an upward, or support, trendline, first put a + under the first column of Os.

 
20
19               
18           X   X 
17       X   X O X O
16       X O X O X O
15 O X   X O X O X O X
14 O X O X O   O X O X O X
13 O X O X     O   O X O X O
12 O X O           O X O X O
11 O X             O   O   O
10 O                       
   +
 

Then move over one box and up one box and draw another +. Repeat this until you hit another column of Os followed by a row of X’s which does not continue the pattern.

 
20
19               
18           X   X 
17       X   X O X O
16       X O X O X O
15 O X   X O X O X O X
14 O X O X O + O X O X O X
13 O X O X +   O   O X O X O
12 O X O +         O X O X O
11 O X +           O   O   O
10 O +                     
   + Upward Trendline
 

The upward trendline indicates the point where buyers start to outnumber sellers.

Downward Trendlines

Now our stock has turned a corner. Let’s look for a downward trendline. Start at a wall of X’s, and use the same plotting technique as before, but at a downward angle. Remember, trendlines always appear at a 45° angle.

 
20              
19               +
18           X   X + Downward Trendline
17       X   X O X O +
16       X O X O X O   +
15 O X   X O X O X O X   + 
14 O X O X O   O X O X O   +
13 O X O X     O   O X O X O
12 O X O           O X O X O
11 O X             O   O   O
10 O                       
 

Confirmation

Both support levels and resistance levels should be confirmed by volume. If volume increases after a breakout, most people agree with the new direction. Point and figure charts have been described as one of the simplest systems for better determining solid entry and exit points in stock market trading. The system monitors supply and demand of each issue while keeping a keen eye on developing trends. While point and figure charting has never been on the top of the list of popular techniques used by technical analysts, there is a growing interest in P&F from all corners of the charting community. Here we take a close look at P&Fs and how to read and construct them.

Constructing P&F Charts

Conventional technical-analysis charts tend to be the open-close/high-low chart. In the creation of P&F, the emphasis is only on the closing price of an issue. The developers of P&F charting were interested in trend development and thus were concerned not with the “noise” created daily by minor moves up or down, but with the larger picture and how that plays out in the areas of supply and demand.

The key to P&F charts is the establishment of the ‘unit of price’, which is the unit measurement of a price movement that is plotted on the graph. On PV charts, there is no time axis, only a price axis. Rising stock prices are shown with X’s and falling prices are shown with O’s. These points appear on the chart only if the price moved at least one unit of price in either direction.

So say the closing prices of a stock moved up one price unit three times. This would appear as a column of three X’s. If the price movement reverses direction, the chart shows a new column of O’s, wherein an O is plotted for each unit of price movement. X’s and O’s never appear in the same column. The chartist, however, must establish how many price units make up a box, which is how much the price must move in the opposite direction for the chart to begin a new column.

Let’s say, for an example, the stock you were tracking was trading at $25, and you were using a $1 unit measurement and a reversal box is three units. Now, if the stock had been trading upward to $25, the stock would have to close at $22 before the chart would reverse to a column of O’s. Because each unit of price movement must be plotted, each unit of price movement down from the $25 level must, in this new column of O’s, be represented by one O. The next reversal would have the stock trading up at least $3, or three points, before a new column of X’s came back into view on our P&F chart. Assume then that the issue continues to fall to $20 before reversing itself; the X’s would reappear once the price hits $23. Remember, you choose the unit size. It could be $0.50, $1 or even $2 if the stock price is high enough. Graphically, the first two columns of our example would look like this:

$25.00 X
$24.00 XO
$23.00 XO
$22.00 XO
$21.00 X


Reading P&F Charts

Now that we have had a look at how to construct a P&F chart, the next question is how do we read it. It is clearly understood by P&F experts that the law of supply and demand determines the price of the stock. If the issue is rising in price and we have an uptrend in place with at least three X’s, we believe that demand has overcome supply. The reverse, when that chart gives us three O’s, indicates supply has overcome demand. P&F charts show us the establishment of trends, trend reversals, and the supply and demand of charted issues.

Here are some examples of PF chart use in making trading decisions: