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Point & Figure Charts

We have created a new Point & Figure section on the Trading Guide (left menu). This includes far more comprehensive coverage of Point & Figure chart patterns, including:

Chart Patterns - Basics

Support and Resistance Levels

How to identify support and resistance on a Point & Figure chart.

Trendlines

How to draw trendlines on a Point & Figure chart.

Breakouts

Breakouts above resistance or below support.

Bullish and Bearish Signs

Explains the significance of rising lows or highs and declining highs or lows.

Bull and Bear Traps

One of the most reliable chart patterns.

Bull Traps

Bull traps occur when an upward breakout retreats back below a resistance level. Resistance is normally associated with two/more equal highs or an earlier major high.

Bear Traps

Wide Patterns

The patterns may also occur in longer time frames. 

False Breaks

Similar to bull and bear traps, false (or marginal) breaks occur at minor support levels (from a previous low) or minor resistance levels (from a previous high). False breaks should only be traded in an established trend.

Up-trend

In an up-trend, if price falls below the previous low by only a small margin (normally only one box) and then promptly reverses upwards, buy on recovery above the previous low.

Down-trend

Retracements

Retracements (or corrections), during a trend, tell us about the strength of the trend. There are three main categories in an up-trend (and the opposite in a down-trend):

Short Retracement

If the retracement is short and reverses above the previous high, this signals both an absence of selling pressure and/or commitment from buyers. Expect a strong up-trend.

Respects Support

If a retracement ends at the first level of support, the previous high, this signals commitment from buyers. While not as strong as a short retracement, expect a healthy up-trend.

Long Retracement

A long retracement, especially when it follows a spike, signals trend weakness. Higher prices may be unsustainable and we need to look out for a short reaction followed by a change of trend.

The same applies to a long retracement following a downward spike: lower prices are unsustainable.

Spikes

How to identify spikes (blow-offs) on a Point & Figure chart.

Up-Trend

 Down-trend

Thomas Dorsey (Point & Figure Charting) mentions a long tail down pattern, where a single column of Os is 20 or more boxes, which he uses as a buy signal. I would not be that adventurous.

Pattern Failure

When the unexpected occurs...

Reversals

Loss of Momentum

After an up-trend, marginal new highs (especially where accompanied by equal or lower lows) indicate a loss of momentum and may evolve into a stage 3 top. 

Marginal Higher Lows

Successive higher lows are a bullish sign, often signaling a reversal in a down-trend.

Triangle patterns

Triangles

Ford [F] presents an example of a symmetrical triangle at [11] on the chart below.

The chart also presents a good example of a wide bear trap at [10].

Cup & Handle

The cup and handle pattern was popularized by William J O'Neil (How to Make Money in Stocks). The pattern could also be described as an ascending triangle. Criteria for the pattern are:

• It must occur in an up-trend; and
• The handle should not be more than half the depth of the cup.

New Support System

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