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FEATURE
Understanding and Using Point and Figure Charts By Wayne A. Thorp, CFA
Without a dou bt, soft software ware and Web sites sit es have mad e the lives lives of numerous investors easier easier by speed ing the an alysis process. One area th at has seen notable improvement is chart creation. Instead Inste ad of having to spend time each each day manually updating charts— wh ich limits limits the nu mber of securities one can r ealis ealistical tically ly track—investors can now create an endless array of charts in a matter of seconds with today’s technical analysis and charting services. Reviews Reviews of th e top softwa re- and Web-based technical analysis and charting serv ic ices es can can be foun d in the Co Comput mput erized Inv es esting ting archives at the AAII Web site (ww (ww w.aaii.c w.aaii.com/ om/ cimember/ ci member/ ). The advent of compu teri terized zed charting resources has also led to the emergence of some relatively obscure obscure cha rt types, such as cand lesti lestick, ck, equivolum equivolum e, and point and figure. This article serves as an introduction to point and figure charting and also covers resources for for creating creating an d learning m ore abou t these charts.
Supply and Demand One of th e basic principles of economics is the law of supply and demand. It states that in a free market wh en there are more buyers than sellers— sellers—deman deman d outstrips supply—prices will rise, all else being equal. Point and fi figure gure charts attempt to capture th e battle battle between supply and demand. Point and figure charts have been in existence for more th an 100 years, but it took the advent of comp comp uter software and Web sites to bring them into the mainstream. Their u sef sefulness ulness lies in their ability to filter out market “noise”— “noise”—short-term short-term pr ic icee fluctu fluctu ations that occur July/ uly/Augus Augustt 2003
du ring longer, more established established trend s. They differ from more conventional charts such as open-high-low-close charts in in that they ignore the p assage of time—they are on ly affected affected by “significant” nifi cant” p rice movemen ts. Figu Figu re 1 is an example of a point and fi figure gure chart for Moody’s Corporation (MCO) that covers the period of January 4, 2002, through June 6, 2003. At first glance, you m ay notice that this chart chart is quite different from the oft-used line or bar charts. First, the chart is made up of colum ns of X’s X’s and O’s— O’s—X X’s rep resen t rising prices and O’ O’ss repr esent falling falling prices. Put anoth er wa y, X’ X’s represent demand and O’s supply. The movemen t from colum ns of X’s X’s to O’s and back again again creates patterns that m ay be used to m ake buy an d sell decisions. decisions. Also,, note that there are num bers and Also letters dispersed among the X’s and O’s. O’ s. Since Since point an d figur e charts are not impacted by th e passage of time, time, per se, numbers and let letters ters are used to repr esent mon ths. The first first box entered entered in a month is represented represented by the num -
bers one through nine for January throu gh September and A, B, B, and C for the “dou bleble-digit” digit” mon ths of October, November, and December. So a “1” wou ld be u sed to ind ic icate ate the first first point of January and “B” would represent November. There are two key items you need to ad dr ess before before you can begin creating your ow n p oint and figure charts— charts—the the box size size and reversal amoun t.
Box Size The box size is based on the scale you w ish to use for a particular secusecurity or index and represents the value given to each box—X or O—on the chart. It It is the min imum pr ic icee chan chan ge needed to continue the curren curren t trend— i.e., to add another X to the top of a column of X’s or to add another O to the bottom of a column of O’s. O’s. This is is an imp ortant decision decision because because a m ove of $3 for a $10 stock stock is more d ram atic than a $3 move on a $100 stock. Each box corresponds to a $1 stock price mov e in our examp le in in Figure 1. Fur Fur -
Figure 1. Point & Figure Figure Ch Chart art Corporat ration ion (1/ (1/ 4/ 200 20 02 2 to 6/ 6/ 200 3) Cha rt for Moody’s Corpo $54 $53
X
$52
X
$51
X
X
8
O
X
O
X
O
X
O
X
O
X
O
X
O
X
O
X
O
X
O
X
O
X
O
X
9
O
X
O
X
O
X
X
O
X
O
X
O
X
O
$45
X
O
X
O
X
O
$44
5
O
X
O
X
B
1
X
O
X
O
X
O
X
O
2
4
O
X
A
O
X
O
X
X
O
O
X
O
X
$50
X
$49
X
O
X
$48
X
O
X
$47
X
6
$46
$43 $42
X
$41
X
O
$40
X
O
$39
1
2
X
O
X
O
3
$38
O
X
O
X
$37
O
O
X
$36
X
X
O
X
O
X
O
X
O
X
O
X
O
7
X X
5 4
3
C
X
O
O 02
03
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Figure 2. Plotting Moody’s Action Points
Date 1/2/2003
Open 41.50
Price ($) High Low 43.70
41.48
1/3/2003
43.95
1/6/2003
44.11
1/7/2003 1/8/2003
44
40
43.12
44
40
42.85
44
40
42.86
41.88
45
41
42.61
41.52
45
41
1/9/2003
41.90
40.61
45
41
1/10/2003
40.48
39.50
40
44
1/13/2003
42.70
41.35
39
43
1/14/2003
42.23
41.25
39
43
$44
X
1/15/2003
41.93
41.25
39
43
$43
1
O
2
1/16/2003
42.85
41.77
39
43
$42
O
X
1/17/2003
42.55
42.01
39
43
$41
O
X
1/21/2003
42.65
42.07
39
43
$40
O
1/22/2003
42.20
41.58
39
43
1/23/2003
42.50
41.85
39
43
1/24/2003
42.25
40.88
39
43
1/27/2003
41.63
39.88
39
43
1/28/2003
41.37
40.36
39
43
1/29/2003
41.65
40.65
39
43
1/30/2003
41.36
40.93
39
43
43.70
1/31/2003
41.99
40.92
39
43
2/3/2003
43.11
41.88
39
43
2/4/2003
42.71
41.54
44
40
thermore, since point and figure charts are used to filter out “noise” in the market, you will want to be sure that you are filtering out just enough momen tary p rice reversals, yet at the same time allowing some to p ass through so that you can identify when a significant reversal is taking p lace. As you u se point and figure charts, you may find that different box sizes work better for your trading style or for a particular security. Traditionally, however, box sizes have been broken dow n into the follow ing levels: Share Price Box Size Below $5 ............................. $0 .25 Between $5 and $20 ............ $0 .50 Between $20 and $100 ....... $1.0 0 Over $100 .......................... $2.0 0
Reversal Method The other key to th e analysis of point and figure charts is how you m ove from one column to an other, called the “reversal method.” The reversal amoun t 22
Close
Action Action Point Point #1 #2
determines how many boxes the price mu st reverse course by in ord er to move to a new colum n an d switch from X’s to O’s, or vice versa. While this can be left to the individu al creating the chart, the typ ical reversal is the “th ree-box” or “three-point” reversal. This methodology is thought to eliminate spu rious price fluctuations and focus only on “significant” pr ice movem ents. Based on the traditional parameters show n her e, if a stock is trading b elow $5 with a box size of $0.25, it would take a price move—up or down—of $0.75 to generate a three-box (threepoint) rev ersal. The box size for stocks trad ing below $5 is $0.25, so a th reebox reversal would take at least three $0.25 p rice mov es to necessitate a sh ift to a new column of X’s or O’s. The same principle applies no m atter the box size. Depend ing on the software p ackage or Web site you ar e using to create point and figure charts, you may have the
ability to sp ecify the box size as w ell as the reversal amou nt. Hav ing established the param eters for the essential elemen ts of a point and figure chart, you mu st then look at w hich price(s) you will use to plot your char t. Purists generally use the high and low prices for the period (day, week , month , etc.), while others may focus strictly on a single price such as the close. This d ecision ma y be driven by the data source you are using—w hether or n ot it offers high and low p rices or merely the closing price. Depend ing on the p rice(s) you use, you m ay get different results. For this reason, it is also important to find out the method used by a software package or Web site to create point and figure charts. When creating point and figure charts, you remain in the same column of X’s or O’s as long as prices continue to rise or fall, respectively. For examp le, if a chart is in a colum n of X’s and prices are rising, you wou ld need to identify wh ether the price raised one fu ll box or m ore. If you are basing your decisions on high and low prices and not the closing price, this is done by looking at the high p rice for the day . If the price did rise by at least one box, you w ould add an X to the top of the colum n. At that point, you are don e for the day. As long as prices continue to rise (or do not fall); the low pr ice is disregard ed. If the high p rice rose by one box but the low p rice was several box sizes below it, you still only plot the one box increase. As long as prices continue in their current p ath, you are only interested in one d irection p er period. If, however, the next day the price does n ot rise by at least one box (staying with ou r examp le of being in a column of X’s), you must look to see wh ether the price reversed by three or more boxes. If it did not, nothing is add ed to the chart for that day. This is an example of point and figure charts filtering out “insignificant” price movements; it also differs from bar charts, wh ere we w ould still plot a bar even if prices do not m ove. If and w hen the price reverses down ward by three
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or more boxes, you would shift one colum n to the right and begin p lotting a new column of O’s.
Point and Figure: Step-By-Step Although computerized tools can create point and figur e charts for you, it is always necessary to understand the underlying process. For this reason, we will show you how to m anually construct a point and figur e chart. Figure 2 shows the high and low prices for Mood y’s Corporation for the period of Janu ary 2, 2003, to Febru ary 4, 2003, as well as the p oint and figu re chart constructed using this data . Dates that are bolded and italicized iden tify where a shift takes place from a colum n of X’s to a colum n of O’s, or vice versa. When m anually creating a point and figur e chart, it is helpful to determ ine the “action points” for each period (also show n in Figure 2). For a chart in a colum n of O’s, the first action p oint is the price that is one box lower than the last. If the low pr ice falls to th is point or below, w e add to the colum n of O’s dow n to the low price for that period. The second action p oint wou ld be the pr ice at wh ich a thr ee-box (three-point) reversal occurs. This point is three boxes above the low est O. If the high price for the day reaches this point, assuming another O was not add ed to the column, we w ould then sw itch to a new colum n of X’s. When you are in a colum n of X’s, the first action point is the pr ice that is one box above th e last X. The other a ction point—where the three-point reversal takes place—is the price that is three boxes below the h ighest X. If this level is reached, w e switch to a new column of O’s. Now , let’s walk throu gh the plotting of data from select d ays in Figure 2. Janua ry 2: When you begin p lotting a p oint and figure chart, you first mu st decide w hether you are in a colum n of X’s or a column of O’s. There are a couple of different methods to use— use the p rior day ’s close as your reference point or u se the first day ’s opening p rice. On ce you select the reference point, the closing p rice on th e first day July/August 2003
you are plotting will dictate whether you begin p lotting X’s or O’s. No te that this is the only time op ening an d closing prices are considered . For this example, we u se the opening pr ice on Jan ua ry 2, 2003—$41.50—as as the reference point. Compar ing the closing price on that day—$43.70—to the reference point, we see that the price increased, meaning w e begin our point an d figure chart by p lotting X’s. When plotting a point and figure chart, it is easier to deal in wh ole num bers, so the high and low prices for each day are rounded upw ard or downward—low prices are rounded up to the next whole number an d high p rices are roun ded dow n. Therefore, $43.70, the high price, is rounded dow n to 43, and this is the point where w e plot the first X of our point and figure chart. How ever, since this is the first p lot in Janu ary w e use a 1 instead of an X. We are now d one for the day. Janua ry 3: Since we are in a colum n of X’s, the first action point is where we w ould ad d another X to the current column , in this case 44—one box abov e 43. The oth er action p oint is 40, which is three boxes below the current X at 43. The high for the day is $43.95, rounded down to 43. Since this is below the first action point, we do not plot anoth er X. Instead , we look at the low p rice for the da y to see if a threebox reversal has ta ken p lace. The low price—$43.12, rounded up to 44—is higher than the second action p oint at 40, so we d o nothing for the day. Janua ry 6: The first action point is that level that is one box above the high est X in the current column —44 (43 + 1). The high price for the d ay, roun ded dow n, is 44. Since this equa ls the first action point, we stay in the same colum n and add an X at the 44 level. Janua ry 9: After ad ding a new X to the current column on January 6, no action was taken on January 7 or 8. The first action point is now 45 (44 + 1). The high price for the d ay, roun ded down, is 41—no additional X’s are add ed to the column. The second action p oint is 41 (44 – 3). The low p rice for the d ay is $40.61, which w e roun d up to 41. Since the low for the day
equals the second action point, a threebox reversal has taken place. Therefore, we sh ift one column to the right and start a colum n of O’s that begins at 43, one box below the h ighest X of the previous column, and goes down to 41. Janua ry 10: Now that we are in a colum n of O’s, we w ant to kn ow if the price fell. The first action p oint is the level where we would ad d another O to the curren t column ; in this case, the box below th e lowest O at 41 is 40. The second action point is where a threebox reversal wou ld take p lace and is three boxes abov e the low est O: 44 (41 + 3). The low price of the day, $39.50 round ed u p to 40, equals our first action point. Therefore, we stay in the column of O’s and add another O to the bottom of the current column at 40. February 3: Since point and figure charts are only concerned with “significant” price movements, do not be surprised if days or even w eeks go by with no activity on the chart, as was the case betw een Janu ary 10 and Janu ary 31. We are still in a column of O’s with the lowest at 40. Looking at the action points for th e d ay, the first is 39 (one box lower than the lowest O at 40) and the second is 43 (three boxes above the low est at 40). The low p rice for th e da y, $41.88 round ed u p to 42, is above the first action point, so w e move on to the high price for the day: $43.11, round ed d own to 43. This equals the second action point, so we shift to a new column of X’s that begins at 41 and goes up to 43, with a 2 at 43 to represent February.
Computerizing Point & Figure Although w e have shown h ow you wou ld man ually create point and figure charts, realistically you w ould u se a software p ackage or Web site to create them for you, allowing yourself more time to perform actual analysis. There are severa l tools available to aid you in this pursu it. StockCharts.com While a relative newcomer to the arena of Web-based charting, the StockCharts Web site 23
Figure 3. StockCharts.com Point and Figure Alert
(www.stockcharts.com) has transformed itself into a lead er in the field. Not on ly does it offer a w ide array of charting options—including p oint and figu re—it also offers chart scanning capabilities and a n extensive educational area dealing with charting and technical analysis. The site offers both free access as well as expanded features with a var iety of subscription op tions ran ging in p rice from $9.95 to $30.95 a month. Two types of point and figure charts are offered: text-based “classic” cha rts and Java-based “dynamic” charts. While the classic charts can b e viewed with any Web browser, you mu st have a Java-enabled Web browser to view dyn amic charts. Free access at the Web site allows you to p lot up to three years of data on a chart; subscribers can plot data going ba ck to 1990. Subscribers also h ave the benefit of being able to save the charts they create for future viewing. 24
One d raw back with the classic chart is that you are limited to predefined time periods over which the data can be plotted. While slightly cumbersome, the dyn amic charts provide a sliding bar where you can specify the exact time period you want charted. With both types of point and figure charts, you can specify the reversal amount for a chart as w ell as the box size. By default, the dynamic charts use the high/ low range in creating the charts, wh ich is the method w e used to create the Moody’s chart. With the classic point and figure charts, you have the option of using the high/ low range or the closing p rice. Once you have created your point and figure chart, you have a nu mber of additional analysis tools and features at your disposal. With the classic charts, users can app ly price overlays such as trading bands, automatic trendlines, and moving averages. While these features are n ot available with the d ynam ic charts, users can plot their own trendlines within the Java ap plet. The site also autom atically generates point and figure alerts for any chart you create. These alerts are av ailable on the classic charts an d are mean t
Figure 4. StockCharts.com Predefined Point and Figure Scans
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to alert you to changes in the supp ly/ dem and relationship of the stock point. Figu re 3 is an examp le of a point an d figur e alert for Mood y’s—in th is case, a bu llish ascend ing triple-top br eakout alert. Another u nique feature is the relative strength chart, w hich is also available only w ith the classic charts. This point and figure chart compares one ticker to anoth er. The pr ice of the first symbol is divided by the price of the second and then scaled to create the chart. Beyond charting, the StockCharts Web site offers stock scans, wh ich a re formu lae applied to the site’s universe of stocks, mutu al fun ds, and indexes that retu rn a list of tickers that m atch the filter criteria of the scan. These scans are broken d own into groups—technical ind icator scans, cand lestick patter n scans, and point and figure pattern scans. There are currently 17 predefined point and figure p attern scans; see Figure 4 for a listing of th ese scans. As this figure also shows, the site offers a link to the list of tickers m atching each scan—as of the end of the last
Figure 5. StockCharts.com Multiple-Expression Scans
Figure 6. MarketScreen.com Point and Figure Chart
July/August 2003
trading day—broken down by exchange. From this list, you can a ccess charts for each of the p assing tickers. Subscribers to the site can a lso create their own scans and save them (Extra! su bscribers on ly). Basic subscriber s can create single-expression scans, while Extra! subscribers can create mu ltipleexpression scans (Figure 5). Once you have created a scan, you can view anywhere from 10 to 999 of the passing tickers, depending on you r subscription level. Finally, for those who are new to point an d figure charting or technical ana lysis, StockCharts.com offers some of the best edu cational content available for free on the Internet in this area. The site’s Char t School offers an overview of technical analysis as w ell as discussions of popu lar chart typ es (including point and figure charts) and technical ind icators. Tutorials are also available on how to use the various elemen ts of the StockCharts Web site.
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Figure 7. Saving Scans in MarketScreen.com
MarketScreen.com The M arketScreen Web site (ww w.m arketscreen.com), as its nam e imp lies, is focused on p roviding stock screening and mar ket alerts. In a similar fashion to StockCharts.com, the MarketScreen site offers p oint an d figure charting and mark et scans both for free and on a subscription basis. From a charting standpoint, the MarketScreen Web site allows users to specify both th e box size and reversal amount. Unfortunately, users do not have the ability to specify a custom time fram e for a chart—several choices for predefined d urations go back as far as five years. Users can sp ecify wh ether they want to use daily, weekly, or monthly data. Those with subscriptions to the site, which cost $49.95 a month or $439.95 a year, can save charts for futur e viewing. This site also uses high/ low pr ices to create its point and figure charts. However, comparing the Moody’s point and figure chart from MarketScreen in Figure 6 to that of StockCharts.com in Figure 3 and the point and figure chart created man ually in Figur e 1, you can see that they
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all differ sligh tly, irresp ective of the differing tim e frames. While they all use high/ low prices, there is obviously room for interpretation w hen creating
such charts. Keep th is in m ind w hen viewing different point and figure charts for the same security. The Mar ketScreen site also offers literally hundreds of market scans or screens covering such areas as price and volume activity, moving averages, chart patterns, sup port and resistance levels, technical indicators, and funda men tal factors. The site prov ides free access to scan results based up on end of-da y da ta from three, four, five, and six trad ing day s prior. A subscription is required to access intraday results as w ell as end-of-da y resu lts for each of the last three trading d ays. There are over 30 point an d figure p attern scans available, w ith the resu lts of each broken dow n by exchange—Nasdaq, New York, and American—as well as by market cap—micro, small, mid, and large. The lists of passing companies provide links to charts, quotes, news items, and SEC filings for each comp any. Subscribers can also create and save their own scans (Figure 7) and view the results on both an intraday and end-ofday basis.
Figure 8. DW A Trading Tradi ng Summary for Subscrib ers
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Dorsey W rig ht & A Associa ssocia tes For many years, the Dorsey Wright & Associates (DWA) Web site (ww w.d orseywright.com) wa s the only site offering point and figure charts, and it continu es to be the sole site devoted exclusively to the discipline of point and figure. The company’s found er, Thomas Dorsey, is often credited with bringing point and figure charting back from the brink of obscurity and is the author of “Point and Figu re Char ting: The Essential App lication for Forecasting and Tracking Market Prices” (second edition, John Wiley & Sons, 2001), a must-read for those interested in point and figure charting. The site is prima rily fee-based, w ith individu al subscriptions ranging from $25 to $45 a m onth . A free three-w eek trial is also available. Upon entering the site, subscribers are presented with a summ ary of the last comp leted trading day—including the point and figure chart activity of key market ind exes and sectors, as well as a calendar of recent and pending economic releases (Figure 8). If you have created any portfolios, you can access them from th is page as w ell. The DWA site offers some basic screening capabilities. The on-line query allows users to choose from a nu mber of criteria—includ ing relative strength, percent oversold/ overbought, market cap—and view those stocks and mu tual fun ds that m atch their criteria. These qu eries can th en be saved for future u se. With the site’s pattern repor ts, you can view those securities forming both bullish and bearish point and figure p atterns. For point an d figure charting, the site uses the high/ low price and allows users to sp ecify the box size and reversal amou nt (Figure 9). Users can also specify the num ber of years they w ant
July/August 2003
Figure 9. DW A Point and Fig ure Chart
charted , with d ata going back to 1986 wh en available. Beyond the point and figure chart, the site provides information regard ing weekly mom entum, sector status, and the latest chart pattern. Once you have created a chart, you can export a PDF document to print or save to your computer. Users can also create and save notations for the char ts they create as w ell as set action price alerts. If the action pr ice you specify is between the high and low price for the day, you w ill receive a notification via E-mail. Each stock tracked by the DWA d atabase has a daily commentary report as well as an evaluation that rates the technical attributes of the stock. The site’s Point & Figur e Un iversity is free to all registered u sers and currently offers six lessons ran ging from the basics of point and figu re charting
to its use in market and sector timing. At the en d of each lesson there is a test that allows you to d etermine your areas of weakness. The site details plans to launch live on-line classes in the futur e, althoug h no timetable is given.
Conclusion Point and figure charts give investors a unique p erspective when viewing p rice activity. By eliminating time from the equation and focusing only on “significant” p rice mov ements, they allow investors to focus on the intera ction between the sup ply and d emand of a given security—the d riving force behind secur ity prices.
W ayne A . Thorp, CFA, is associate editor of Computerized Investing and A A II’s financial analyst.
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