Point and Figure Retracements
Retracement Chart Patterns
Retracements (or corrections), during a Point and Figure trend, tell us about the strength of the trend. There are three main categories in an up-trend, while the converse applies to 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.
Example
A strong up-trend on Yahoo displays a number of short retracements, reversing at or above the first support level (from the previous high).
Also note the triangle at [1] and the false break below the previous low at [7].
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.
Example
The All Ordinaries displays a recent example of a downward spike followed by rapid retracement and a subsequent trend-change.
- False break above the previous high in a down-trend.
- Equal high confirms resistance.
- Downward spike.
- Strong retracement.
- A short reaction follows: only two Xs.
- A break above the previous column of Xs confirms the trend change.
Author: Colin Twiggs is a former investment banker with over 30 years experience in financial markets. He co-founded Incredible Charts and writes the popular Trading Diary newsletter.
Colin also writes The Patient Investor newsletter which focuses on the global economic outlook and key macro trends.
In addition, he founded PVT Capital (AFSL No. 546090) which offers investment strategy and advice to wholesale clients.