Point and Figure Spikes

Spike Chart Patterns

Point and Figure Up-Trend

An upward Point and Figure spike, where a rally exceeds the previous column of Xs by at least 10 boxes. This is a signal to take profits: spikes can reverse sharply and there is nothing worse than seeing those hard-earned profits disappear before your eyes.

Occasionally you will be lucky enough to experience two/more spikes in succession; so be on the lookout for a short pull-back (no more than say 3 boxes). Re-enter if there is a short retracement followed by a breakout above the previous high. Keep stops tight.

Point and Figure 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. I suspect that successive downward spikes are more common than successive upward spikes. If, however, a column of Os exceeds the previous trough by at least 10 boxes, it is clearly a signal to take profits on short positions. Exit on the start of a new column of Xs.

Re-enter if there is a short retracement followed by a breakout below the previous low. Keep stops tight.

Pattern Failure

At times we are all confronted with situations like this: Caltex Australia [CTX] failed to correct sharply on the Point and Figure chart as expected. Instead it formed a narrow consolidation after a tall spike, before breaking out on the upside.

A narrow consolidation is a bullish sign in an up-trend. There are two options:

  1. Re-enter during the consolidation; or
  2. Enter on the breakout above the previous high.

Stops can be placed below the lower border of the consolidation.

Colin Twiggs

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.