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Trading with Point & Figure Charts

PnF University

Dorseywright.com

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History of Point and Figure Technical Analysis.

A brief history of Point and Figure Charting along with some statistics on sector timing versus market
timing.

The premise of Point & Figure charting is to provide a logical, organized and sensible way of recording
the supply and demand relationship in any particular security or sector. When it is all said and done, if
there are more buyers in a particular security than there are sellers willing to sell, the price will rise. On
the other hand, if there are more sellers in a particular security than there are buyers willing to buy, then
the price will decline. If buying and selling are equal, the price will remain the same. This is the irrefutable
law of supply and demand. The same reasons that cause price fluctuations in produce such as potatoes,
corn and asparagus cause price fluctuations in securities. - taken from the book "Point and Figure
Charting" by Tom Dorsey.

The chart above depicts the first style of Point & Figure charts. Over the years, they have evolved. Today,
the price is located on the vertical axis and the "figures" are replaced with X's and O's. X's represent
demand and are always moving up the chart while O's represent supply and are always moving down the
chart.

This methodology was prominent in the 1960's but then dropped out of favor. This form of technical
analysis is unique and to become a craftsman requires study. By attending this on-line University you are
well on your way to becoming a craftsman. You will learn more about this in Lesson 1.

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Welcome:
Lesson 1: Introduction
Here we go! In this section we will list any
This chapter is designed to familiarize you with Point and Figure upcoming live online classes
Charts, we call these "attributes" in this University. For those that are specifically covering this chapter.
familiar with PnF and have used it in their investment research, you will
know most of these terms and concepts. However, it is good for a
review as terms used in this chapter will be repeated throughout the
University. This chapter does include vital information for basic charting
and it shouldn't be skipped over as it is a foundation for the following
chapters. Chapter 1 is the base and each chapter following is a vital
component in understanding the big picture, how to put it all together.
One cannot understand the whole without knowing the parts.

Lesson 1 Contents:

Part 1: Attributes of a Chart Part 2: Chart Basics


Attributes Three box reversal
Box Scales Box scale tables
Dates and date lines Flow chart of investing
Trading bands Examples of how to chart
Numbers and letters for the months Support Lines
Part 3: Support Lines
Bullish Support Line
Bullish Resistance Line
Bearish Resistance Line
Bearish Support Line

Test yourself at the end of the chapter to sharpen your skills.

If you have any questions, please check the "Questions" section to see if it has already been answered. If
it has not, then click on the question mark icon below to email us your question. It will be answered
shortly (within two business days).

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Welcome:
Lesson 1: Part 1. Attributes of a Chart

Here is a Point and Figure Trend Chart with the characteristics pointed out and described. We will go into
detail as we continue through the first lesson.

A Point and Figure Trend Chart:


The trend chart depicts the price action of the stock. We call it the trend chart because of the support and
resistance lines that determine whether a chart is above or below trend. If someone say's "...the trend
chart" you know they mean this type of chart, this is different from an RS chart for example.

* X's mean the chart is rising


* O's mean the chart is declining.
Key Points:
* Never will you see X's in a column of O's or vice versa.
* Each column must have at least three X's or three O's.

You will notice some


columns have
numbers or letters in
place of an X or an
O. (In blue). These
depict months:
1 = January
2 = February
3 = March
This continues until
October in which...
A = October
B = November
C = December
This is because two
digit numbers
wouldn't fit in the
box.

Value / Price The vertical axis is the price scale. From this you can determine the value
column of each row.
These are hyphenated as "Bot" for the bottom of the trading band, "Med"
for the medium of the trading band and "Top" for the top of the trading
Trading Bands:
band. Applications of the the Trading Bands will be discussed in later
chapters.
The Bullish Support Lines and Bearish Resistance Lines help us
Trend Lines:
determine the trend of the stock.

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Welcome:
Lesson 1: Part 2. Chart Basics:

Details of the individual chart characteristics.

The scale for a point and figure chart is on the left hand side or the
vertical axis. By looking at the price increments of the scale we can
Value/ Price Column
determine the box size at that level.

Box sizes: Price of Stock Box Size


Changes are
determined by the price 0.00 - 5.00 0.25
range of the stock or 5.00 - 20.00 0.50
index. Here is a guide 21.00 - 100.00 1.00
to those changes.
+ 102.00 2.00

Examples: 0.25 box 0.50 box 1.0 box 2.0 box Notice how the increments work,
What the price columns how the value changes and is
would look like in the 5.00 9.00 40.00 120.00 determined by the box size.
4.75 8.50 39.00 118.00
various box sizes: 4.50 8.00 38.00 116.00
4.25 7.50 37.00 114.00
4.00 7.00 36.00 112.00
3.75 6.50 35.00 110.00
3.50 6.00 34.00 108.00

Crossing Box Sizes: 0.25 to 0.50 box 0.50 to 1.00 box 1.0 to 2.0 box
There are times when a
stock will cross several 6.00 22.00 104.00
5.50 21.00 102.00
box sizes. Here is an 5.00 change here 20.00 change here 100.00 change here
example of what that 4.75 19.50 99.00
price column would 4.50 19.00 98.00
look like: 4.25 18.50 97.00
4.00 18.00 96.00

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Welcome:
Lesson 1: Part 2. Constructing A Chart:

Rules for Charting:


Learning how to update a Point & Figure chart is fairly simple but there are a couple of ground rules you
must first understand. First, the Point & Figure chart uses the high price and the low price for each trading
day. Second, the chart continues in the current column if possible. Third, a minimum of three boxes are
required to change columns. Finally, a chart can only move in one direction a day. These four rules of
charting are most easily understood by looking at them in a Flow Chart format.
Flow Chart for PnF Charting:
Here is the Flow chart for PnF charting. If you meticulously follow this flow chart, you can not go wrong.
Following the flow chart we will discuss each question.

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First Flow Chart Question: "Continue Current Column with X or O?"

Whichever column the chart is in, you will remain in that column as long as the stock continues moving in
that direction. If the chart is currently in a column of X's your first question is, "Did the stock rise one full
box or more on the chart?". If it did move one full box, then you record that move by adding another X to
the column. You are now done updating that chart for the day.

As mentioned above when charting, you are concerned with the price which causes the chart to continue
in the current column. In other words we are establishing an action point. If the chart is in a column of X's,
you are looking at the high price of the day, rounding down to the next whole number. If the chart is in a
column of O's, you are looking at the low price of the day, rounding up to the next whole number.

29
28 X <-28 7/8 is not high enough
For example, a stock has a high of 28 7/8. For
27 X to close the 29 box.
charting we would use this at 28 26 X
25 X
32 O
When looking at the low, you go up to the next
31 O
whole number. Using the same example, a stock
30 O
has a low of 28 7/8. You would read this as a low 29 O <-28 7/8 is not low enough
of 29. 28 to close the 28 box.

For the smaller box sizes you still round to the "whole" numbers in the box.

11.00
For example, in the .50 box size if a stock trades 10.50 X <-10.63 is not high enough
to 10.63 you would mark up to the 10.50 box not 10.00 X to mark up to the
the 11.00 box. 9.50 X 11.00 box
9.00 X
5.00
With the .25 box size if a stock trades to 4.73 for 4.75
instance, you would mark the boxes to 4.50 not 4.50 X <-4.73 is not high enough
4.75. 4.25 X to mark up to the
4.00 X 4.75 box.

Second Flow Chart Question: "Does Stock Reverse Columns on Chart?"

If the answer to the first flow chart question was "no", then we must determine whether the chart reverses
direction thus changing columns. We use a three box reversal method to determine a reversal.

Three Box Reversal Method:


The price action of a stock is marked by two different columns, by X's for the price moving up and O's for
the price moving down. In other words, X's are for demand and O's are for supply. To move from one
column to the next, from X's to O's or vice versa, Point and Figure charts require a three box reversal.
The stock must be able to move three boxes before it can change columns. If a stock is in X's at $25 then
it must fall 3 boxes to reverse into a column of O's. This would be $3 since the scale of the chart at $25 is
$1 per box and it must reverse by three.
Reversal Requirements: 0.00 to 5.00 0.75 pts.
Use this as a guide. 5.00 to 20.00 1.50 pts.
20.00 to 100.00 3.00 pts.
100.00 to 200.00 6.00 pts.

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Examples:
Here are examples of the three box reversals for the different box sizes.

0.00 to 5.00 chart (0.25 box) 5.00 to 20.00 chart (0.50 box)
As shown in this example, the price had to move down As shown in this example, the price needed
or up a total of 0.75 points to complete the three box to move 1.50 points down to make a full
reversal. reversal.

The reversal up, a move from 3.50 to 4.25, is a total of The reversal up, a move from 16 to 17.50, is
.75 points. a total of 1.50 points.

A move down from 4.50 to 3.75, is a total of .75 points. The reversal down, a move from 18 to 16.50,
As per the guide above that is the amount needed for is a total of 1.50 points.
the reversals.

20.00 to 100.00 chart (1.0 box) 102.00 + chart (2.0 box)


As shown in this example, the stock needed to move As shown in this example, the stock needed
3.00 down to make a full reversal. See how on this to move 6.00 points down to make a full
chart a larger point move is needed than the previous reversal.
two.

The reversal up, a move from 106 to 112, is


The reversal up, a move from 24 to 27, is a total of 3 a total of 6 points.
points.
The reversal down, a move from 114 to 108,
The reversal down, a move from 28 to 25, is a total of 3 is a total of 6 points.
points.

If the stock does not meet the criteria to reverse (described above) then there is not action on the chart
for that day. Unlike a bar chart, a Point and Figure chart won't necessarily make a movement everyday. If
the price action of the trading day does not continue the chart in its current direction (flow chart question
1) or change columns (flow chart question 2), no mark is made on the chart.

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For example, on the 1 box chart: 32 X <-32.50 Isn't high enough
Let's say a stock trades a high of 32.50 and a low 31 X to add an X.
of 29 7/8 and the column of X's are at the 32 level. 30 X
We'll go into more detail about this in a little bit. 29 X <-29 7/8 isn't low enough
to add O's

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PnF Chart Examples:
Here we demonstrate how a chart builds over a period of trading days.

Beginning Chart
High 47.63 Low 43.25
The top X is at the 46 level. The first thing to determine is whether the stock traded as high as 47 to add
another X. It has to be 47 even, not 46.999 but 47. Looking at the trade information (High 47.63, Low
43.25) it did trade as high as 47 so we can add another X to the column. That is all to be done for the day.

Next Trading Day


High 47.975 Low 43
Each day is the same process. You look at the high and low to determine if you can continue in the same
column or if you have enough for a three box reversal. The high needed to add another X would be 48,
but the high was only 47.975, not enough. So now you look to see if it moved low enough for a three box
reversal at 44. The low was 43, so yes, it is enough for the three box reversal. In fact it adds four boxes
(O's).

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Next Trading Day
High 50.125 Low 41.975
We are now in a column of O's so we look first to see if the stock trades low enough to add another O. If it
does an O is added no matter how high the stock trades. The stock managed to add another O to the
chart because it traded to 41.975 filling the 42 box. We do nothing with the move to 50.125.

Next Trading Day


High 50.50 Low 41.45
Again the same procedure. We look to see if the stock traded to 41 to add another O and if not did it trade
high enough for a three box reversal up. Even though it traded into the 41 range it did not hit 41 even so
therefore, no additional O. Now we check if it traded high enough for a three box reversal up into X's at 45
and it did, it traded as high as the 50 box.

10
Welcome:
Lesson 1: Part 3: Support Lines

One of the most important guides you have in Point and Figure charting is the Bullish Support or Bearish
Resistance Lines. It is uncanny how a stock will follow along either the Bullish Support or Bearish
Resistance Line. They are like brick walls.
A stock is bullish if trading above the bullish support line and bearish if trading below the bearish
resistance line.

Bullish Support Line.

Serves as a guide for the up trend of a


stock.
Has a habit of acting like a brick wall.
Stocks will often come right down to the
bullish support line and then bounce off.
To draw the support line, you must first
have a buy signal off the bottom. Go to the
lowest column of O's and begin drawing a
line up at a 45 degree angle. The angle will
always be a 45 degree angle.

Once a stock has formed a base of


accumulation and gives the first buy signal,
we go to the lowest column of O's in the
chart pattern and begin drawing a trend
line. Starting with with the box directly
under that column of O's and diagonally
connecting each box upward in a 45 degree
angle. This method, unlike bar charts,
never connect prices - the angle for the
Bullish Support Line (also known as the
BSL) is always 45 degrees.

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We will typically give a stock the benefit of
the doubt if it gives a sell signal while it is
trading close to the Bullish Support Line.

Once a stock is well above the long term bullish support line, short term trend lines can be drawn. When a
stock rises significantly above this trend line and gives more buy signals, you can go to the bottom O of
that new distribution and draw another trend line. The first Bullish Support line will always serve to be the
long-term trend line and may very well come into play years later. These shorter term trend lines serve as
visual guides for you. The short-term trend lines can also be valuable to the trader in identifying the
direction of stocks. Traders often initiate a long trade when the stock has declined near the Bullish
Support Line because the stock is then close to the stop-loss point. The most important characteristic of
the Point and Figure method is its clear guidelines for entering and exiting a trade. Once of the main keys
to successful investing is avoiding the big hit. These guidelines will help you do that.

Example of a chart trading above its BSL,


notice the gap in space between the X's
and O's and the BSL. We will draw a
secondary BSL from the area of
accumulation around 18.
See how the secondary line would work for
traders? It gives a closer support line than
the original BSL and with that a closer stop
on trades. Not all stocks trade high above
the original BSL and the original will be all
that is needed but in the case of high flying
stocks, secondary lines can be very helpful.

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When the stock penetrates the trend line
(the BSL) and simultaneously gives a sell
signal, it is critical event and a strong sign
to sell the stock. To qualify as a
penetration, the trend line must be violated
and not just touched. There is no such thing
as the line being a little penetrated. It is or it
isn't. Below, the stock maintained the trend
line all the way up from $15 to $25. Soon
after, supply took control of the stock.
When the stock hit $21, it not only gave a
double bottom sell signal but also violated
the Bullish Support Line. The violated
support line was the key sign there was a
high probability that the trend had changed.
*A trend change is when the trend chart
turns from negative to positive or vice
versa. This correlates to the Bullish Support
or Bearish Resistance Line. As long as the
stock trades above the BSL it is a positive
trend but once it pierces that line the trend
becomes negative. We will go over buy and
sell signals in Lesson two.

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Welcome:
Lesson 1: Part 3: Support Lines cont.
Bullish Resistance Line.

The Bullish Resistance line is drawn by


moving to the left of the last buy signal and
going to the first wall of O's. Remember, it
is not the first column of O's but the first
wall of O's. A wall of O's is usually that last
down move in the stock from which it
begins to bottom out. This is the point
where demand begins to take the upper
hand.
Go to the column of X's right next to the
wall of O's and begin drawing your trend
line, beginning with the empty box above
that top X. This line will be a 45 degree
angle as is the Bullish Support Line.
Typically, a stock will encounter resistance
as it moves to the Bullish resistance Line
though this line may have to be drawn a
number of times. The boundaries of the
Bullish Support Line and the Bullish
Resistance Line form a trading channel.

Here the Bullish Resistance Line is drawn


after the Wall of O's, above the column of
X's beside it at the 21 dollar box.

Bearish Resistance Line.

Exact opposite of the bullish support line. It


serves as a guide for the downtrend of a
stock.
Has a habit of acting like a brick wall.
Stocks will often rally right up to the bearish
resistance line and then bounce off.
To draw the resistance line, you must first
have a sell signal from the top. Go to the
highest column of X's and begin drawing a
line down at a 45 degree angle or a 135
degree angle.
Once a stock is well below the bearish
resistance line, short term resistance lines
can be drawn.
The bearish resistance line must be
violated and not just touched in order to
turn the trend positive.

We typically prefer not to go long when below the Bearish Resistance Line. This line, like the Bullish
Support Line, can be as strong as a brick wall. We say a stock is bearish when it is on a sell signal and
below the Bearish Resistance Line. Be wary of buy signals that come from just below this resistance line
as they tend to be false or best suited to traders. Stocks that are moving up to this line typically find
formidable resistance there. Also, a stock must be on a buy signal to penetrate the Bearish Resistance
Line. Short sales can be initiated in weak stocks when the underlying stock rallies up to the resistance
line but is still below it. This is the optimum point to sell short on any of the bearish chart patterns.

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The Bearish Support Line.

The Bearish Support Line is the reciprocal


of the Bullish Resistance Line and is drawn
by moving to the left of the Bearish
Resistance line to the first all of X's. Again,
not to the next column of X's but to the first
wall of X's. Then move the the first column
of O's next to it and begin drawing your
support line down from the empty box
below the last O. The line, which will
automatically be a 135 degree angle by
connecting the diagonal boxes, can be
used as a guide to identify where any
decline might be contained.

The Bearish Resistance Line and the


Bearish Support Line, in combination, form
a channel that the stock can be expected to
trade in. Movement down to the Bearish
Support Line is likely to cause bottom
fishing as investors create demand
supporting the stock at that level. As the
stock rises to the resistance level, investors
who have been stuck holding the declining
stock will elect to sell on rallies

.All the lines together.

With the DWA database only the primary support lines are shown; The Bullish Support and the Bearish
Resistance Line.

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Example of a long term Bullish Support Line.

61 | | 61
60 --------+---------------------------------------------------+---X ----------------------60 -
59 | | X O X 59
58 | X | X O X O 58
57 | X O X | X O X O 57
56 | X X O X O X X O X O 56
55 --------+---------------------------------------X O X O X O X O X O --2 ------------ Med55 -
54 | X O X O X O X O X O 54
53 | X B X C O | 1 X O 53
52 | X O | O X * 52
51 | X X X | O X <--Bounced here 51
50 --------+-----------X O X O X ------7 --X ------X ----------+-O * ----------------------50 -
49 | X O X O X O X O X O X | * 49
48 | X O X 5 X O X O X O X * 48
47 | X O X O O X X O X O X X * | 47
46 | X O O X O X O X O X O X * | 46
45 -------+-----------X --------O X O X O X O A O X ----* ----+---------------------------45 -
44 | X 4 O X O 8 X O X O X <--Bounced here. 44
43 | X O X O X O X 9 X O * 43
42 | X O X O X O O * 42
41 | 3 O X 6 * 41
40 --------+-------X O ------------------------* --------------+---------------------------40 -
39 * X X * | 39
38 * X O X * Notice how the stock has 38
37 * X O X X * traded above the BSL and 37
36 Break ---->X O X O X * has bounced a couple of times 36
35 of BRL X --1 O X O X ----------------* ------------------------+---------------------------35 -
34 X O X O X 2 * | 34
33 X O X O * | 33
32 X C X * | 32
31 X X O | * | 31
30 - X O X --+---------------* ----------------------------------+---------------------------30 -
29 X O X | * | 29
28 X B | * | 28
27 O X | * | 27
26 O X | * | 26
25 O X ------+-----* --------------------------------------------+---------------------------25 -
24 A X | * | 24
23 O X | * | 23
22 O X * | 22
21 O X * | | 21
20 O X --* --+---------------------------------------------------+---------------------------20 -
19.5 O X * | | 19.5
19.0 O * <--Bullish Support Line is created. ----------------+---------------------------19.0

16
Example of a long term Bearish Resistance Line:

57 | | | |
57
56 * | | |
56
55 ---------------X * <--Bearish Resistance Line created. -----------------| -----------------
-------55 -
54 X X O * | | |
54
53 X O X O * | | |
53
52 B O X 1 * | | |
52
51 X C | O * | | |
51
50 -----------X --| O --------* ----------| --------------------| ----------------------------| ------
------------------50 -
49 X X | O * | | |
49
48 X O X | O X * | | |
48
47 X O X | O X O * | | |
47
46 X A * 2 X O * | | |
46
45 ---X --9 ----* | O <--Break of BSL | --------------------| ----------------------------| ----------
--------------45 -
44 X O X * | O * | |
44
43 * 8 O X * | 3 | * | |
43
42 O X O * <--Bullish | * | |
42
41 O X * Support | * | |
41
40 -O * -------Line O -------- X ------| ------* ------------| ----------------------------| ------
------------------40 -
39 * | O X X O | * | |
39
38 | O X O 6 O | * | |
38
37 | O X O X O | * | |
37
36 | O O X 7 | * | |
36
35 ---------------| --------O X --X O ----| ----------------* --| ----------------------------| ------
------------------35 -
34 | O X O 5 8 | * | See how the stock continues to
follow the
33 | 4 X O X 9 | * Bearish Resistance Line down and
bounces
32 | O O X O | | * off the line a couple of times.
31 | O X O | | * |
31
30 ---------------| ------------O --O ----| --------------------| ----* ----------------------| ------
------------------30 -
29 | O | 5 | * |
29
28 | O X 3 O X | * |
28
27 | O X O X O X O | * |
27
26 | A X C O X O X O | * |
26
25 ---------------| ----------------O X O X 1 --6 --8 ----------| ------------6 * ------------| ------
------------------25 -
24 | O X O X O | 5 O <--Bounce off here.
24
23 | O B | O | X O * |
23
22 | | O | X 9 * |
22
21 | | O | 2 X O X * * |
Top21
20 ---------------| ----------------------| --------O ----X ----| ----X O X --X O X O X --X * <--
Bounce off here. -20 -
19.5 | | O X O | X O X O X O X O X O X O *
19.5
19.0 --------------| ----------------------| --------O ----X O --| ----X O X O X A X O X O X O | * ----
------------------19.0
18.5 | | 9 X O | X O X O X O X O B X O | *
18.5

17
18.0 --------------| ----------------------| --------O ----X O X | ----X O 3 O X O ------O X O | ----*
------------------18.0
17.5 | | O X O X O X X O X 4 X O X O X
* Med17.5
17.0 --------------| ----------------------| --------O X --B C X O X O X O X O ----------C --O X O X --
2-----------------17.0
16.5 | | O X O X O O X O X O O X O X O
X 16.5
16.0 --------------| ----------------------| --------O X O X ----O X O X --------------------O | 1 X O
X ----------------16.0
15.5 | | O X O X 1 O | O O
X 15.5
15.0 --------------| ----------------------| --------O X O ------| ----------------------------| ----O
------------------15.0
14.5 | | O X | |
14.5
14.0 --------------| ----------------------| --------O X --------| ----------------------------| ------
-------------- Bot14.0
13.5 | | O X | |
13.5
13.0 --------------| ----------------------| --------O A --------| ----------------------------| ------
------------------13.0
12.5 | | O X | |
12.5
12.0 --------------| ----------------------| --------O X --------| ----------------------------| ------
------------------12.0
11.5 | | O | |
11.5
11.0 ------------9 | 9 ------------------9 | 9 ------------------| ----------------------------| ------
------------------11.0

18
Welcome:
Lesson 1: Wrap Up

Lesson 1 is dedicated to familiarize you with Point and Figure charts, basic charting concepts and the
three box reversal method.

It is important that you understand fully the workings and rules of three box reversals, the box sizes and
the flow chart of investing. Without a sound knowledge of this information it will be difficult to understand
the following lessons and the more in depth features of Point and Figure. The change of box size is
always something that takes a little getting used to and it is highly advisable that you continue to do your
own hand charting even after completing this University. The better you familiarize yourself with three box
reversals the more comfortable you will be with your skills in PnF charting.

Another neat thing to do is pull up a chart on the DWA database, one that has made a significant move
during the trade day, and see what the chart looked like before the major move. This way you can get a
feel of the chart prior to large swings either up or down - see what the chart was telling you ahead of time.
I found this to be extremely helpful and a fun exercise to work on daily. Getting the "feel" of the charts will
build your confidence as well. Use the DWA database to print charts to keep by hand.

You will in time be able to look at a chart with high and low of the day and even during the trade day, and
determine the direction of the chart. This becomes almost intuitive in time. If you still find the concept
confusing review the lesson again and of course read Tom Dorsey's book "Point and Figure Charting" in
chapters 1 and 2. His book has examples to learn from and also his personal experiences.

Part 1: Attributes of a Chart Part 2: Chart Basics


Attributes Three box reversal
Box Scales Box scale tables
Dates and date lines Flow chart of investing
Trading bands Examples of how to chart
Numbers and letters for the months

We will now test you to find your comprehension of the subjects discussed in Lesson 1.

19
Testing for Lesson 1: Attributes of a chart

1) Type the appropriate number or letter into the provided field for each corresponding month:
October: September: August:

June: November: March: December:

2) Identify a specific attribute of these charts:


83
82 *
81 X * <--This item here is...?
80 X O * X The Bear Reversal Line
79 O X O * B
78 O X O * X I-95 North
77 O X O * X
76 O X O X The Bearish Resistance Line
75 O --O --------X
74 O X X X A Constellation
73 O X O X O X
The Bullish Support Line
72 O X O X O X
71 O X O O X
70 ----O X ----O X

88 X
87 X X
86 X O X
8 1 O X
84 O X O X
83 O X O X The Bearish Resistance Line
82 O X X O X *
81 O X O X O X * I-95 South
80 O X O X O X -- * -----Top
The Bullish Support Line
79 O X O O X *
78 O X O * <--This item is...? Positive Trading Band
77 O X *
76 O X * A Bullish Terrier
75 O X * --------------Med
74 O X *
73 O *
72 *

3) Match the box size to the price range by typing the appropriate letter into each field.
You may use the same answer multiple times:
Box Size Price Range

2.00 a: 20.00 - 100

0.75 b: None/ NA

0.25 c: 5.00 - 20.00

0.50 d: 0.00 - 5.00

1.00 e: 102 +

4) Constructing Charts: Answer Yes or No to the following

20
a. The Low price of the day and the close price of the
day are used to construct a chart. yes no
b. The High and Low price of the day is used for
constructing a PnF chart yes no
c. It is possible for a chart to have no action during the
trade day yes no
d. X = Supply
yes no
e. A chart can move in more than one column in a day.
yes no
f. A chart must be updated and a new column added
every day. yes no
Flowchart of Investing:

If a chart is in a column of X's, you first look


to see if the chart reversed down into O's?
yes no
at the High of the day to see if an X is to be added?
yes no
If the chart is in O's, you first look
to see if the stock declined one full box during the
day? yes no
for the possibility of a reversal up into X's if the stock
rose 20 points. yes no

If a chart is in X's at $28 and the low for the day is $24, the high for the day is $29 and the stock closed at
$24.5. The action on the chart would be...

Reversal to $24. Up one row to $29. No change on


the chart.
If a chart is in O's at $19 1-2 and the low for the day is $19 1-8, the high for the day is $21 7-8 and the
stock closed at $21. The action on the chart would be...

The chart will fall to 19. The chart will reverse No change on
to the upside the chart.

Score Test

21
Welcome:
Lesson 2: Introduction
This chapter concentrates on the basic buy and sell signals for all PnF In this section we will list any
charts and pattern development. First we will show how supply and upcoming live online classes
demand control the movement of the chart and how these signals are specifically covering this chapter.
created. Then we will describe the different patterns and how they
develop. Every chart develops a pattern which tells a story. It is through Message Board
the understanding of these patterns that we can analyze a chart. Here
are the basics.

Lesson 2 Contents:

Part 1: Chart Patterns Part 2: Price Objectives


Battle between supply and demand Vertical Price Objective
Double Top/Double Bottom Bullish Vertical Count
Triple Top/Triple Bottom Bearish Vertical Count
Catapult formations Horizontal Price Objective
Triangle formations Bullish Horizontal Count
Spread Triple Tops Bearish Horizontal Count
Shakeout formations Price Objectives with different box sizes.
Signal Reversed Patterns Calculations through changing box sizes.
Long Tail Down Examples
High Pole

Test yourself at the end of the chapter to sharpen your skills.

If you have any questions, please check the "Questions" section to see if it has already been answered. If
it has not, then click on the question mark icon below to email us your question. It will be answered
shortly (within two business days).

22
Welcome:
Lesson 2: Part 1. Chart Patterns

Battle Between Supply and Demand.

The PnF Chart depicts the battle between Supply


and Demand. There are two basic signals that
develop. They are the Double Top Buy signal and
the Double Bottom Sell signal. These are the two
most basic patterns and it is imperative that you
understand them.

A buy signal shows A sell signal shows supply


demand is in control of is in control. In this case
the stock. It occurs the stock exceeded the
when a column of X's previous column of O's.
exceeds the previous
colomn of X's.
The Double Top Break Double Top Double Top Break

A double top break occurs when a chart, in X's,


runs into resistance. Supply gains control and the
chart reverses into O's. Demand then regains
control of the chart and it reverses back into X's
where it rallies to the previous resistance. Here the
double top is formed. When the chart is able
exceed the this resistance level and rise another
box it gives the double top break.

The Double Bottom Break

A double bottom break occurs when a chart, in O's, Double Bottom Double Bottom Break
falls to support. Demand gains control and the
chart reverses into X's. Supply then regains control
of the chart and it reverses back into O's where it
falls to the previous support. Here the double
bottom is formed. When the chart is able exceed
the this support level and fall another box it gives
the double bottom break.

23
The Supply and Demand Scenario.

Double Top:

1) For example, IBM rises to 2) Over the next few


$60 and meets selling weeks demand once
pressure. This selling again creeps back into
pressure exceeds the the stock and causes the
demand at that price and the price to rise to $60 per
stock retreats. Remember, it share. This is causes a
requires a three-box reversal three-box reversal back
to change columns. In this up into a column of X's,
example, the selling pressure was enough to force and IBM now sits at the
IBM back to $57, the chart reverses to O's from X's. same level that previously caused supply to enter
the market.

3) The question now is If it is again repelled, then the sellers are still there.
whether the sellers that If it instead is able to move to $61, then we can say
forced the stock back that demand has prevailed at this price by
before are still there. The exceeding the level where supply had previously
only way to find out if the gained control. By exceeding this level of resistance
sellers are still operating the Point and Figure chart gives its most basic buy
at that price is to see how signal, the Double Top Break.
IBM negotiates that level. Demand is now in control of this stock.

Double Bottom:

1) In this pattern, supply wins 2) Demand comes into the stock


the match. Instead of IBM with the price rising to 57 and
exceeding the previous point reverses the chart into a column
of resistance, it instead of X's.
reversed and exceeded the
previous level of support.
Here the stock first reverses
down into O's to the 54 level.

24
3) The stock encounters Summary:
selling pressure which Supply wins and the probability of lower prices
drives IBM back down come into play. The reason supply overtook
the chart to the 54 level demand is not important. What is important is
where demand knowing that supply is in control, for in the end,
previously took control supply and demand cause stocks to move up and
providing support. down and nothing else.
However this time, the
buyers are not there as
before and the selling
pressure persists until
the stock exceeds that level of support.
Supply again takes over and the chart reverses
back down to 53 exceeding the support at 54 and
creating a double bottom sell signal at 53.

More Examples:
Here the stock rises to $60 a second time where it is
repelled. This shows there is resistance at that level.
The column of O's exceeding the previous column
of O's gives the double botom sell signal, one of the
most basic patterns. At this point we do not have
enough pieces of the puzzle to say whether to sell
the stock. As we conintue through the university all
the different pieces will start to come together.

This stock found good support at 54. This is clearly


shown on the chart as the price where columns of
O's stopped. This is one of the great advantages of
Point and Figure charts. They are as clear as it gets.
There is no mistaking whether a stock gave a buy or
sell signal. In this example, after holding the
support, demand regains control and exceeds the
previous top at $57 giving the double top buy signal.

The Bullish Signal

We add one more dimension, an added clue, to the


pattern this time. In this next pattern, the last column
of O's does not extend down as low as the previous
column of O's. We call that a rising bottom. It
signifies that supply is becoming less a factor in
driving the stock. On the other side of the coin,
demand is getting stronger as the last column of X's
exceeds the previous column of X's giving a double
top buy signal. The rising bottom shows us that
supply is getting weaker providing added guidance
when evaluating the supply-demand relationship of
the underlying stock.

25
The Bearish Signal

Demand in this case is becoming weaker as the last


column of X's fails to reach the previous level.
Selling pressure however is increasing as evidenced
by the lower column of O's. These clues simply
suggest demand is losing strength and supply is
gaining strength.

The Bullish and Bearish Signals here are part of Double Top/Double Bottom patterns but when analyzing
charts with all patterns types recognizing a series of higher bottoms and tops or lower tops and bottoms is
crucial in making the right trade or investment decision.

So far we have discussed the Double Bottom and Double Top. All other other patterns we will cover are
expansions of this basic form. By now, you can see how simple this method is to grasp.

26
Triple Top Buy Signal

The Triple Top The buy signal is given when the stock
is exactly what exceeds the level that previously caused
the name the stock to reverse down.
suggests - a
chart pattern
that rises to a
certain price
level three
times. The first
two times the stock visits that level, it is
repelled by sellers. The third time the stock
rises to that level, it forms the Triple Top.

There are many reasons why a stock will encounter supply at certain levels. Think back to a time when
you bought stock thinking it was at a bottom or at least an opportune price level to buy. Instead of rising,
the stock immediately declined. We have all had experiences like that. The thought that probably crossed
your mind as you saw the stock lose value was that if the stock got back to even you were out! This is a
perfectly normal human reaction. When you place that order to get out at your break-even point, you are
in essence creating supply at that level. If more sellers are willing to sell their stock at that level than
buyers are willing to buy, the stock will decline. The only way we know whether the selling pressure has
been exhausted at a particular level is if the stock is able to exceed that price. If the stock is repelled
again, the sellers are still there. The more times a stock pulls back from a resistance level, the stronger
the breakout will be when it comes. It was said years ago that the degree to which a stock will rise is in
exact proportion to the time the stock took in preparation for that move. In other words, the wider the base
from which a stock breaks out the higher the stock will rise. This is why we consider the triple top break a
stronger pattern than the double top.

Triple Bottom Sell Signal.


The Triple Bottom sell signal, like the Triple Top, has a high degree of reliability. It is characterized by a
stock falling to an area of support three times. The first two times the stock holds and reverses up. The
third time there is not enough demand to cause the chart to reverse and instead it exceeds the two
previous bottoms giving the triple bottom sell signal.

Consider for a What is he missing in this puzzle? What he is missing


moment an is that a battle between supply and demand has been
investor who buys completed with supply winning the
a stock at $31 per
share and then
leaves on vacation
for one month. He
checks the price

27
frequently and notices that his stock is still
around the price he paid for it, only down a
point. Not bad for a market that had been
volatile for the past month. He feels
comfortable with the stock as the
fundamentals remain in place.

match.

The probability of lower prices is very high. The Triple Bottom sell signal does not mean that the stock will
cave in immediately, it suggests that the risk in that position has increased tremendously. Whether this
investor chooses to do anything about the signal or not, he should at least be aware of it. If the investor
does nothing other than increase his awareness of a potential decline, he is far ahead of the investor who
holds the same position without any warning. It is imperative to update the charts. By doing so patterns
such as this one will not sneak up on you.

The Bullish and Bearish Catapult Formation

The Bullish Catapult is a combination of the Triple Top buy signal and the Double Top buy signal. This
pattern is a confidence builder. The Catapult is created when a stock gives a Triple Top buy signal whic is
followed by a pullback producing a higher bottom. Following the pullback, demand regains control and the
stock reverses back up and gives a Double Top buy signal. The charts below depict a Bullish Catapult
formation.

Bullish Catapult First Completed:


the Triple Top... A triple top followed
Then the Double Top... Then the Double Top Break by a double top break.

Notice the Triple Top buy signal followed by the pullback into a column of O's. Notice how the column
produces a higher bottom. The resumption of trend completes the Catapult by giving a Double Top buy
signal. To better understand what the Catapult is saying, let's look at each piece of the pattern as
illustrated above.

1.)The Triple Top is saying that the 2.)The subsequent reversal


stock has a very high probability of producing a higher bottom
rising in price, assuming the market suggests that supply is beginning
is in a bullish mode. to dry up or become a less
In fact, this type of pattern has a significant factor.
success probability of 87.5% in bull
markets.

28
3.)The resumption of trend This is a pattern that you can be aggressive with
and subsequent Double Top especially when the overall markets are in a bullish
buy signal simply confirms mode, the underlying sector is in a bullish mode,
the Triple Top. This is why it and the fundamentals are superior in the stock (we
is called a confidence will cover all of these other aspects in later
builder. lessons.).

29
Welcome:
Lesson 2: Part 1 continued... Chart Patterns

Bearish Catapult
This can be interpreted exactly opposite the Bullish Catapult formation and is particularly useful in timing
short sales as it clearly shows supply in control. Watch carefully for this pattern because it suggests lower
prices from the underlying stock. Below is an example of how it is formed.

First the Then the Then the Double Completed:


Triple Bottom ... Double Bottom... Bottom Break... A triple bottom followed
by a double bottom break

Let's break this down some more.

Interpreting what this In the same respects of a Bullish


formation is telling us we first Catapult being a confidence builder the
see the Triple Bottom break, Bearish Catapult is a confirmation of a
which you have already stock breaking down. The Triple
learned is very negative for Bottom sell signal is then followed by a
the stock. lower top and a Double Bottom sell
signal, two sell signals in a row along
with a lower top.

These two signals together clearly show supply coming into control of the stock and demand drying up.

Looking at the two stocks to the right. If they are Bullish Catapult Bearish Catapult
both recommended on a fundamental basis, in the
in the same sector and at the same price, Which
one would you buy? Clearly, you would pick the one
on the left. The beauty of Point and Figure is that it
is very visual, very easy to see which stocks are
rising and which are breaking down.

30
The Triangle Formation

The Triangle formation is easily identified by the higher bottoms and


lower tops. This sounds a little backwards but what is happening is that
the chart is a bit confused. There is no clear winner in the battle between
Supply and Demand. As the lower tops and higher bottoms develop the
chart comes to a point creating the triangle look of the pattern. When the
chart comes to a point either supply or demand will have to gain control
and either a double top break or a double bottom break will be given. A
break to the upside designates a Bullish Triangle and a break to the
downside designates a Bearish Triangle. To qualify as a Triangle, the
pattern must have at least five vertical columns. Examples of the Bullish
and Bearish Triangle are below.
5 columns needed to complete
a triangle.
Bullish Triangle

If the pattern resolves itself up, it will give a double top buy signal. The
Double Top buy signal simply suggests that demand has won the match
and the probability is higher prices in the stock.

Bearish Triangle

If the pattern breaks down the match is won by supply. The Double
Bottom sell signal suggests that the probability is lower prices in the
stock.

Spread Triple Top Pattern and Spread Triple Bottom Pattern.


This pattern is basically the same as the triple top and triple bottom with one exception. The testing of the
support or resistance level is not completed in three consecutive columns. For example, a stock may rally
and test 55 twice, then on the third trip back up it only reaches 53 before it pulls back again. Then on the
fourth atempt it is able to break the 55 level. The stock still exceeds the 55 level it tested three times but
there was a "spread" between the second and third atempt. This is one that is best understood by looking
at an example.

Spread Triple Top Spread Triple Top Spread Triple Bottom. Spread Triple Bottom
A gap in between three break. A gap in between three break
columns of X's at the A column of X's column of O's at the same A column of O's exceeds
same level. exceeds the spread level. the spread triple bottom.
triple top.

31
The same philosophy applies with these patterns as the Triple Top and Bottom. We will take a look from
the Triple Top perspective. In each case, the stock rises to a certain price level and is repelled two times.
The third attempt at that price is successful by the stock moving through the level shown by a column of
X's exceeding the point of resistance. Since the stock was repelled twice at that same level, there are
apparently sell orders there. The reason is not important. What is important is that you know there are
sellers at that particular level. The only way to know if demand can overtake the selling pressure is to see
how the stock negotiates the level again. Simply stated, if the stock is repelled again at this level of
resistance, the sellers are still there. You need not know any more. If the stocks exceeds that level, then
demand has overcome the supply that previously caused it to reverse.

Notice that in the following two patterns, the stocks are trading at the same price. Consider that both
stocks are fundamentally sound and each is being recommended by a major firm on Wall Street. Both
stocks are in the same industry group and pay about the same dividend. You have studied the
fundamentals of the two stocks and are now trying to determine which stock to buy. It's the moment of
truth. Which stock do you select?

Stock A: Spread Triple Top Stock B: Spread Triple Bottom

Without the chart patterns shown here, you would be in a quandary. Looking at the fundamental data
alone, both stocks are equal, therefore both stocks should do about as well in the future. Not so. If you
had the benefit of evaluating the Point and Figure charts the selection process would become much
easier. With the information and charts above which stock do you select? It doesn't take an in-depth
understanding of this method to determine Stock A is on a buy signal with the probability of higher prices
and Stock B is on a sell signal with lower prices likely.

This simple exercise shows why charts are so important and why you can achieve the best results in the
market when you use both fundamental and technical analysis.

32
Welcome:
Lesson 2: Part 1 continued... Chart Patterns

The Shakeout Formation.


This pattern has a high degree of reliability. The Shakeout is relatively new and we have found it very
useful in real-life application. It is called the Shakeout because the pattern is deceiving causing some
holder of the stock to sell, in effect "shaking out" these weak holders.

For the pattern to be a true Shakeout formation, it must have the following attributes.

1. The stock must be in a strong up trend and trading above the Bullish Support Line.
2. The stock must rise to a level where it forms two tops at the same price forming a Double Top.
3. The subsequent reversal of the stock from these two tops must give a Double Bottom sell signal.

Shakeout Pattern

First, this pattern is in a strong up trend. Then the chart gives a Double Bottom sell signal.

Bearish Signal Reversed.

This pattern must have seven columns to


qualify. Each column of X's must be lower than
the one before and each column of O's must
carry lower than the one prior to it. Action of this
type indicates supply is in control and getting
stronger. In this pattern we will see the stock
reverse up and quickly, without a period of
accumulation, break a double top. This reverses
the series of lower tops and often leads to a
strong move to the upside. The action point with
this chart is the breakout. We wait for the
breakout because until it is given supply is in
control. We do not see this pattern very often
but when we do its one of the best.
Bullish Signal Reversed.

This pattern is the reverse of the Bearish Signal


Reversed. This pattern shows seven columns of
rising bottoms and rising tops. When the last top
is made in the seventh column, the stock
reverses and without a period of distribution
declines to give the Double Bottom sell signal
reversing a series of rising bottoms.

33
Long Tail Down.

To qualify for a Long Tail Down, we like to see a


stock that has declined 20 boxes or more with a
reversal up. We are not going to split hairs over
20 boxes down. In fact, we start looking when a
stock falls 18 O's down. What we are looking for
here is a trade. The next three box reversal to
the upside often leads to a decent bounce.
When evaluating these plays we want to find
stocks that have pulled back to an area of
support and we want the reversal to occur fairly
quickly. If the stock falls 20 boxes and sits there
for 3 months then we wouldn't look for much of
a "Dead Cat Bounce".

High Pole Warning Formation.

This pattern is not actually a sell signal. It


occurs when a chart exceeds a previous column
of X's by at least 3 boxes. Following the rise in
X's, the stock must pull back at least 50 percent
of that last up-thrust on the chart. The thought
behind the formation is that there must be
something wrong with the supply-demand
relationship if the stock subsequently gave up
50 percent of the last move up. It's a warning
that supply might be taking control of the stock.
In the example to the right the stock rises above
the previous column of X's by four boxes
making the move 7 boxes in total. A greater
than 50% retracement would be a pullback of 4
boxes or a move to 19.

34
Welcome:
Lesson 2: Part 2 - Price Objectives.

Vertical Price Objective and Horizontal Price Objective.


This technique is used when evaluating the risk/reward ratio of a stock. It is imperative that you evaluate
the risk/reward ratio when investing. This will be covered in detail in later lessons. Price objectives are
NOT set in stone, but are a good guideline in determining how far a signal can carry a stock. There are
two types of counts; the Vertical Price Objective and Horizontal Price Objective. With each type you can
determine a bullish and bearish price objective. Each are described below.

The Vertical Price Objective.


You will hear people ask "What is the PO?" - meaning, "What is the Price Objective?". Typically we use
the Vertical count when evaluating price objectives. We prefer to use the Horizontal count when a stock
has built a large base. Here are how they are calculated.

For the Bullish Vertical Count:


Look to the column that has the first buy signal off the bottom and count the number of X's in it. You wait
for the reversal down into a column of O's before counting the number of X's up to ensure there will be
no more X's added to the column.
Once you have counted the X's, multiply by 3 (for the three box reversal method) and then multiply that
product by the value per box.
Add this result to the bottom X

There are 10 X's in the first column of X's from the LAST
sell signal.
Multiply 10 times the three box reversal method (3) 10 x 3
= 30
The box size is 1 (we will cover box sizes in a minute) so
the calculation now is 30 x 1 which equals 30.
Add 30 to the bottom X of the column you counted 30 + 21
= 51.
51 is your price objective.

Let's break it down piece by piece.

35
1: 2:
Find the last sell signal on the chart Find the column of X's that create the buy signal after the last
sell signal.

3: 4:
Determine if the run in the column of X's Count the column of X's with the buy signal.
has been terminated by a reversal.

5: 6:
Determine the price level at the bottom Start your calculation.
of the column of X's.

Formula: (# X's)(3)(box size) + bottom X = PO

There were 10 X's in the column.


10 x 3 (for the three box reversal). = 30.
30 x 1 (box size) = 30.
30 + 21 (bottom X at the $21 level).= 51

51 is the Vertical Price objective.

36
Welcome:
Lesson 2: Part 2 - Price Objectives.

The Bearish Vertical count.


Look to the first sell signal off the top and count the number
of O's it moves down before reversing back up. You wait
for the reversal up into a column of X's before counting the
number of O's down to ensure there will be no more O's
added to the column.
Once you have counted the O's, multiply by 2 (this is
where the bearish count is different from the bullish count)
and then multiply that product by the value per box. This is
because the market generally has a bias towards the
upside so we multiply by a smaller number.
Subtract this result to the top O

Let's break it down.

1: 2:
Find the last buy signal on the chart Find the column of O's that create the sell signal
after the last buy signal.

3: 4:
Determine if the run in the column of O's has been Count the column of O's with the sell signal.
terminated by a reversal.

5: 6:
Determine the price level at the top of the column of Start your calculation.

37
O's.
Formula: (# O's)(2)(box size)-Top O = PO

There were 10 O's in the column.


10 x 2 = 20.
20 x 1 (box size) = 20.
31 - 20 (top O at the $31 level). = 11

11 is the Vertical Price objective.

38
Welcome:
Lesson 2: Part 2 - Price Objectives- Horizontal Count.

Horizontal Price Objective.


The Horizontal Price Objective is determined by measuring the base that a stock has created and broken.
Stocks that have formed a large base lend themselves to the horizontal count. Otherwise we would use a
vertical count. When a stock creates a large base, we measure its width. The base of the formation must
be unbroken. In other words, you must be able to count horizontally the columns filled with X's and O's
without any spaces in between. Find the widest part of the base that is unbroken to count. In general, a
horizontal count is a judgment call. There are no minimum columns required but you will see many charts
where a large area of accumulation was created and then the chart broke out. These are the charts
where a horizontal count is most effective - we think of them as powder kegs. The more it builds up the
more explosive the breakout can be.

Bullish horizontal count.


Once a buy signal is given, count across the base the
stock has built.
Multiply the number of columns across the formation by
3 and then multiply that product by the value per box.
Add this number to the bottom of the formation.

Let's break it down.

39
1: 2:
Make sure there is a buy signal off an accumulated Find the widest part of the base unbroken, that can
base. be counted.

3: 4:
Count the columns. Find the bottom of the base. Sometimes this is a
judgment call too.

5:
Calculate the PO.

Formula:
(# Col. across the base)(3)(box size ) + bottom of base = PO

Widest part of formation is 7 boxes.


7 x 3 (three box reversal) = 21
21 x 1 (box size) = 21.
Add 21 to the bottom of the base
which is 20
21+ 20 = 41.

Horizontal Price objective is 41.

Welcome:
Lesson 2: Part 2 - Price Objectives - Horizontal Count.

40
Bearish horizontal count.
Once a sell signal is given, count across the base the stock
has built.
Multiply the number of columns across the formation by 2 and
then multiply that product by the value per box.
Subtract this number from the top of the base.
As with the bearish vertical count we multiply the bearish
objective by 2.

Let's break it down.

1: 2.
Make sure there is a sell signal off an accumulated Find the widest part of the base unbroken, that can
base. be counted.

3: 4:
Count the columns. Find the top of the base. Sometimes this is a
judgment call .

5: Calculate the PO.

Formula: (# boxes across)(2)(box size)- Top of base = PO

Widest part of formation is 8 boxes.


8 x 2 (bearish is 2) = 16
16 x 1 (box size) = 16
Subtract 16 from the top of the base which is 34
34 -16 = 18

Horizontal Price objective is 18.

Welcome:
Lesson 2: Part 2: Price Objectives

41
Price Objectives with different box sizes.
Now that you have the basics down for doing the vertical and horizontal counts adding the different box
size calculations will be easier. The box size changes do effect the price objectives of the chart. This is
because we are measuring the strength of the move off the bottom and that is measured by the
movement in price. So, when the scale changes we must adjust. Sometimes, when a chart crosses over
two different box sizes you have to do the calculation twice and add together. Let's start with a table of the
calculations.

Bullish Vertical Counts:

Example: We have 10 X's in a column to Price


Box Size Formula
count. Bottom X is a variable. Objective
0.25 (X)(3) = (?)(.25) + bottom X = PO (10)(3) = (30)(.25) = 7.5 + 1.25 = 8.75. 8.75
0.50 (X)(3) = (?)(.50) + bottom X = PO (10)(3) = (30)(.50) = 15 + 12.50 = 27.50. 27.50
1.00 (X)(3) = (?)(1) + bottom X = PO (10)(3) = (30)(1) = 30 + 21 = 51. 51
2.00 (X)(3) = (?)(2) + bottom X = PO (10)(3) = (30)(2) = 60 + 102 = 162. 162

Examples:

0.25 Box Size. .50 Box Size


3.50 X <--10 X's. 17.00 X <--10 X's.
3.25 X O 16.50 X O
3.00 X O 16.00 X O
2.75 X O 15.50 X O
2.50 X X 15.00 X X
2.25 X X X 14.50 X X X
2.00 X O X O X 14.00 X O X O X
1.75 X O X O X 13.50 X O X O X
1.50 O O X 13.00 O O X
1.25 O X<-Bottom X. 12.50 O X<-Bottom X.
1.00 O 12.00 O
(10)(3) = (30)(.25) = 7.5 + 1.25 = 8.75. (10)(3) = (30)(.50) = 15 + 12.50 = 27.50.
1.00 Box Size 2.0 Box Size
30 X <--10 X's. 120 X <--10 X's.
29 X O 118 X O
28 X O 116 X O
27 X O 114 X O
26 X X 112 X X
25 X X X 110 X X X
24 X O X O X 108 X O X O X
23 X O X O X 106 X O X O X
22 O O X 104 O O X
21 O X<-Bottom X. 102 O X<-Bottom X.
20 O 100 O
(10)(3) = (30)(1) = 30 + 21 = 51. (10)(3) = (30)(2) = 60 + 102 = 162.

You can see here how the momentum changes as the box sizes become higher.

Bearish Vertical Counts:

Example: We have 5 O's in a column to Price


Box Size Formula
count. Top O is variable. Objective

42
0.25 (O)(2)=(?)(.25) = ? Top O -? = PO (5)(2) = (10)(.25) = 2.5. 5 - 2.5 = 2.55. 2.5
0.50 (O)(2)=(?)(.50) = ? Top O -? = PO (5)(2) = (10)(.50) = 5. 15 -5 = 10. 10.
1.00 (O)(2)=(?)(1) = ? Top O -? = PO (5)(2) = (10)(1) = 10. 50 -10 = 40. 40.
2.00 (O)(2)=(?)(2) = ? Top O -? = PO (5)(2) = (10)(2) = 20. 150 - 20 = 130. 130.

Examples:

0.25 Box Size. .50 Box Size


5.50 X 15.50 X
5.00 X X O <-Top O 15.00 X X O <-Top O
4.75 X X O X O X 14.55 X X O X O X
4.50 X O X O X O X 14.00 X O X O X O X
4.25 X O O O X 13.50 X O O O X
4.00 O <--5 O's 13.00 O <--5 O's
3.75 12.50
3.50 12.00
(5)(2) = (10)(.25) = 2.5. 5 -2.5 = 2.5. (5)(2) = (10)(.50) = 5 15 - 5 = 10.
1.00 Box Size 2.00 Box Size
51 X 152 X
50 X X O <-Top O 150 X X O <-Top O
49 X X O X O X 148 X X O X O X
48 X O X O X O X 146 X O X O X O X
47 X O O O X 144 X O O O X
46 O <--5 O's 142 O <--5 O's
45 140
44 138
(5)(2) = (10)(1) = 10 50 -10 = 40. (5)(2) = (10)(2) = 20 150 - 20 = 130.

For Horizontal Counts it is the same thing. You take the box size and put it into the appropriate slot for
calculation.

Bullish Horizontal Count.

Box Example. We have 10 boxes and the Price


Formula
Size bottom of the base is a variable. Objective
0.25 (boxes)(3) = (?)(.25) + bottom of base = PO (10)(3) = (30)(.25) = 7.5 + 3.5 = 11. 11
0.50 (boxes)(3) = (?)(.50) + bottom of base = PO (10)(3) = (30)(.50) = 15 + 15 = 30. 30
1.00 (boxes)(3) = (?)(1) + bottom of base = PO (10)(3) = (30)(1) = 30 + 35 = 65. 65
2.00 (boxes)(3) = (?)(2) + bottom of base = PO (10)(3) = (30)(2) = 60 + 102 = 162. 162

Bearish Horizontal Count.

Box Example. We have 10 boxes and the Price


Formula
Size bottom of the base is a variable. Objective

43
0.25 (boxes)(2) = (?)(.25) = ? Top of base -? = PO (10)(2) = (20)(.25) = 5. 5 - 3.5 = .1.5 1.5
0.50 (boxes)(2) = (?)(.50) = ? Top of base -? = PO (10)(2) = (20)(.50) = 10. 15 -10 = .5 5
1.00 (boxes)(2) = (?)(1) = ? Top of base -? = PO (10)(2) = (20)(1) = 20. 30 - 20 = .10 10
2.00 (boxes)(2) = (?)(2) = ? Top of base -? = PO (10)(2) = (20)(2) = 40. 150 - 40 = .110 110

44
Welcome:
Lesson 2: Part 2: Price Objectives

Calculations through changing box sizes.


This is where the vertical counts becomes confusing but as long as you understand the different
calculations for the box sizes, you will be able to do this easily. Just add the two calculations together.
You will not have this type of calculation with the Horizontal count because it inherently does not cross
different box sizes, only the vertical count.

.25 to the .50 Box Size .50 to 1.00 Box Size 1.00 to 2.00 Box Size

Count the X's from the bottom X Count the X's from the bottom X to Count the X's from the bottom X to
to the change of count. Here it is the change of count. Here it is four the change of count. Here it is three
three boxes. Do the calculation boxes. Do the calculation for the boxes. Do the calculation for the 1
for the .25 box scale. .50 box scale. box scale.
3 x 3 = 9 x .25 = 2.25 4 x 3 = 12 x .50 = 6 3 x 3 = 9 x .1 = 9
Now count the remaining X's, Now count the remaining X's, Now count the remaining X's, which
which is 7, and do the which is 6, and do the calculation is 7, and do the calculation for the 2
calculation for the .50 box scale. for the .50 box scale. box scale.
7 x 3 = 21 x .50 = 10.5. 6 x 3 = 18 x 1 = 18. 7 x 3 = 21 x 2 = 42.
Add the two totals together. Add the two totals together. Add the two totals together.
2.25 + 10.5 = 12.75 + 4.50 = 6 + 18 = 24 + 18.50 = 42.50 9 + 42 = 51 + 98 = 149
17.25 Price objective is 43. We round up Price objective is 149
Price objective is 17.50 We since it falls into the 1 box scale.
round up since it falls into the
.50 box scale.

45
Calculation for O's
Remember that you multiply by 2 not 3 for the three box reversal. Everything is in reverse so be aware of
which box sizes you are multiplying.
.25 to the .50 Box Size .50 to 1.00 Box Size 1.00 to 2.00 Box Size

Count the O's from the top O to Count the O's from the top O to the Count the O's from the top O to
the change of count. Here it is two change of count. Here it is three the change of count. Here it is
boxes. Do the calculation for the boxes. Do the calculation for the 1 three boxes. Do the calculation
.50 box scale. box scale. for the 2 box scale.
2 x 2 = 4 x .50 = 2 3x2=6x1=6 3 x 2 = 6 x 2 = 12
Now count the remaining O's, Now count the remaining O's, which Now count the remaining O's,
which is four, and do the is three, and do the calculation for which is four, and do the
calculation for the .25 box scale. the .50 box scale. calculation for the 1 box scale.
4 x 2 = 8 x .25 = 2. 3 x 2 = 6 x .50 = 3. 4 x 2 = 8 x 1 = 8.
Add the two totals together. Add the two totals together. Add the two totals together.
2 + 2 = 4. 6 + 3 = 9. 12 + 8 = 20.
5.50 - 4 = 1.50 22 - 9 = 13 104 - 20 = 84
Price objective is 1.50 Price objective is 13 Price objective is 84

46
Welcome:
Lesson 2: Part 2: Price Objectives

Some Charts to example the Vertical Count.


We'll use charts as they appear on a database.

84 X X <--Stock almost hit price objective.


83 X O X O This is why we say it is a guide not
82 X O X O an absolute.
81 X O X O
80 --------------X O X O X -------
79 X O X O X O
78 X O X O X O
77 X O O X O
76 X O X O
75 --------------X ----O ---------
74 3
73 X
72 X
71 X
70 --------------X ---------------
69 X
68 X
67 X X X
66 X O X <--Buy Signal. This is the column of X's to count.
65 --X O X --X O X -------------
64 X O X O X O <--Reversal to O's terminating the coulumn of X's.
63 X O 2 O X
62 X O X O X
61 X O X O X
60 --X O --O X ------------* -
59 X O <--Sell Signal.
58 X O X <--Bottom X
57 1 O *

10 x 3 = 30 x 1 = 30 + 58 = 88. Price objective is 88

53 A <--Buy Signal
52 X X X O Top
51 X O X O X O
50 -------------X O X O X O --------------------
49 X O X 9 X O
48 7 8 O O
47 X X O <--Sell Signal. Count this column of O's
45 ---------X O X --------O X <--Reversal into X's terminating column of O's.
44 X O X O X O X O X X O *
43 X 5 O O X O X O X O X O
42 X O X O O X O X O X X O
41 X O X O X O X B X O X O
40 -----X O ------------------O X O X O X O X Med
39 X 4 O O O X O X
38 X O X O X O
37 X O X O X
36 3 O X
35 -----------------------------------O -<--Stock came very close
34 to the bearish vertical count

10 x 2 = 20 x 1 = 20. 52 - 20 = 32. Price objective is 32.

Horizontal Price Objective.

47
59 | X <--Breakout of base.
58 | X X
57 | X X O X
56 | X O X O X
55 -----+---X --X O ----------------X O X ------
54 X | X O X O X O X
53 X O | X O X O X X X X O X
52 X O | X O X O X O X O X O X O X Med
51 X O X X O X O X O X O X X O X O X
50 -X O X O X O X O X O X O X O X 3 X O <--Widest part
49 X O X O X O X O O O X O X O X of base unbroken.
48 X O X 1 X O X O X O X O
47 X O X O X O 2 O X O
46 X O | O X O X O *
45 -X --| O X O X --------------------* -------
44 X | O O <--Base support level.

18 x 3 = 54 x 1 = 54 + 44 = 98. Price objective is 98.

48
Welcome:
Lesson 2: Wrap Up

The battle between Supply and Demand is at the heart of Point and Figure Charting.

From this chapter you have all the basics needed to understand patterns and price objectives. You can
see how the price movement in a stock creates the patterns. These patterns tell the story of the battle
between supply or demand.

Once you have a good understanding of how charts develop and build your confidence with practice, you
will be able to recognize chart development quickly and accurately. Once you know the basics you can
apply your understanding to any PnF chart.

Price objective is a guide, not an absolute. It is useful in helping to determine the risk reward parameters
of a trade. Always remember that PnF is an art form, not a science.

Lesson 2 Contents:

Part 1: Chart Patterns Part 2: Price Objectives


Battle between supply and demand Vertical Price Objective
Double Top/Double Bottom Bullish Vertical Count
Triple Top/Triple Bottom Bearish Vertical Count
Catapult formations Horizontal Price Objective
Triangle formations Bullish Horizontal Count
Spread Triple Tops Bearish Horizontal Count
Shakeout formations Price Objectives with different box sizes.
Signal Reversed Patterns Calculations through changing box sizes.
Long Tail Down Examples
High Pole

We will now test you to find your comprehension of the subjects discussed in Lesson 2.

49
Testing for Lesson 2

Part 1: Chart Patterns

1) Identify the following patterns:


There are some trick questions here. You can use the patterns/selections as many times as you
think they apply.

O X X X
O X O X O X X
O X O X O X X X O X
O X O X O X O X O X O X
O X O O X O X O X O
O O X O O
O X
-- Select One -- -- Select One --

X
X X O X
X X X X O X O X
X O X O X X O X O X O
X O X O X X O X O X O
X O X O X O X O X O
X O X X O X O O
X O X O O
X
-- Select One -- -- Select One --

X X X
X O X O X O
X O X X O X O
X O X O X O O
X X O X O X O
X O X O X O
X O X X
X O X
X
-- Select One -- -- Select One --

O X
O X X X O X X
O X O X O X X O X O X X
O X O X O X O X O X O X O X
O O O X O X O X O X O X
O O X O X O X O
O X O X O
X O
X
-- Select One -- -- Select One --

O X X
O X O X X O X
O X O X X O X O X X

50
O X O X O X O X O X O X
O X O X O X O X O X O X
O O O X O X O X O X
O X O X O X O X
X O O O
X
-- Select One -- -- Select One --

X X
X X X X O X
X O X O X X X O X O X X
X O X X O X O X X O X O X O X X
X O X O X O X O X X O O X O X O X
X O X O X O O X O O X O X
X O O X O O X
X X O
X
X
-- Select One -- -- Select One --

2) Which pattern must have exceeded a previous column of X's by at least 3 boxes and must pull
back at least 50 percent of that last up-thrust on the chart?

Bearish Signal Reversed Bullish Catapult

Bullish Triangle High Pole Warning

Shakeout Pattern None

3) Which Pattern ideally has the following characteristics?

The stock must be in a strong up trend.


The stock should be trading above the Bullish Support Line.
The stock must rise to a level where it forms two tops at the same price.
The subsequent reversal of the stock from these two tops must give a Double Bottom sell
signal.

Bearish Signal Reversed Bullish Catapult

Bullish Triangle High Pole

Shakeout Pattern None

4) To qualify as a Triangle, the pattern must have how many columns?

7 5 6 10

5) The combination of a Triple Top and a Double Top make up which pattern?

51
Bearish Signal Reversed Bullish Catapult

Bullish Triangle High Pole

Shakeout Pattern None

6) Can the Bearish Catapult have any sell signals in the combination?

Yes

No ( trick question - the Bearish Catapult naturally has sell signals)

Part 2: Price Objectives

1) Vertical Counts:

Do the Vertical Count on the following patterns and match them to the given prices. Remember,
some may be rounded up or down because of the change in box sizes.
Hint - Both positive and negative counts are represented here.

82 X
81 X O 57 X
80 X O 56 X X O X
79 X O 55 X X X O X O X
78 X O 54 1 O X O X O X O X
77 X 53 X O X O X O O 2
76 X 52 X O X O O X
75 X 51 X O X O X
74 X 50 X O O
73 X 49 X
72 X 48 X
71 X 47 X
70 X X 46
69 X X X O X 45
68 X X O X O X O X 44
67 X O X O 3 O X O X 43
66 X O X O X O X O X 42
65 X O X O X O O X 41
64 X O X O O X 40
63 X O X O 39
62 X O X 38
61 X O 37
60 X 36
35
-Select One- -Select One-

11.5 8.5 X

52
11.0 8.0 X O
10.5 7.5 X X O
10.0 X 7.0 X O X O
9.5 X O X 6.5 X O X O
9.0 X O X X O 6.0 X O X X
8.5 X 3 O X O X O 5.5 X O X O X
8.0 X O X O X O X O 5.0 X O X 1 O X
7.5 X O X O O X 4.75 X O X O X O X 2
7.0 X O X O X 4.50 X O X O X O X O X
6.5 X O O 4.25 X O X O O X O X
6.0 X 4.00 X O X O O
3.75 X O X
3.50 X O
-Select One- -Select One-

114
280 X 112 X
276 X O X 110 X O
272 X O X O 108 O X O
268 X O X O 106 O X X O
264 X O X O 104 O X O X
260 X O X O 102 O X O X
256 X O X O 100 O X O X
252 X O X O 99 O X O X
248 X O X O 98 O X O X
244 X O X O X 97 O O X
240 X O X O X O 96 O X
236 X O X O 2 O 95 O
232 X O O X O X
228 X O X O X
224 X O O X
220 X O
-Select One- -Select One-

2) Horizontal Counts:

Do the Horizontal Count on the following:


Hint: Both negative and positive are represented here.

142
140 X
138 O X O X
136 O X O X O
134 O X O X O
132 O O X X X X X O
130 O X X O X O X O X O X X O X
128 O X O X O X O X O X O X O X O X
126 O X O X O O X O X O X O X O
124 O X O X O O O O
122 O O
120
-Select One-

16.0
15.5 * X

53
15.0 X * X
14.5 X O * X
14.0 X O * X
13.5 X O * X X
13.0 O * X X O X
12.5 O * X O 3 O X
12.0 O 7 8 X B X O X O *
11.5 6 X O X O X O X O X X O X *
11.0 O X O X O X O X O X O X O *
10.5 O O O O C X O X *
10.0 O 1 *
9.5
9.0
8.5

-Select One-

114 O
112 O
110 O
108 O * X
106 O * X O
104 O * X O
102 O * X O
100 -O ----X ----------X --*-------X O
99 O X X O X X O X X X
98 O X O X O X X O X O X O X O X
97 O X O X O X O X O X O X O X O X
96 O X O X 2 X O X O X O X 3 X O X
95 O X O X O X O X O X O X O X O X
94 O X O X O X O X O X O X O O *
93 O X O O X O X O X O X * *
92 O X O X O X O X O X *
91 O X O X O O X O *
90 O O O *
-Select One-

154
152 X X X
150 O X O X O X O X X
148 O X O X O X O X O X O
146 O X O X O X O X O X O X
144 O X O X O X O X O X O X
142 O X O X O X O X O X O X
140 O O X O X O X O O X
138 O O O O X
136 O X
134 O X
132 O
-Select One-

Score Test

54
Welcome:
Lesson 3: Introduction

Now that you understand how patterns develop and what is a bullish or In this section we will list any
bearish signal, this chapter will teach you how to gauge those signals upcoming live online classes
against the market using relative strength. specifically covering this chapter.

In any market there are always leaders and laggards. Our goal as Message Board
investors, is to have a portfolio of leaders, not laggards. The tool we
use to determine which stocks and sectors are the leaders is Relative
Strength.

Lesson 3 Contents:
Part 1: Relative Strength Part 2:
Evaluating Coca-Cola Example
Potential Scenarios Wal-Mart Example
Formula Various Examples

Test yourself at the end of the chapter to sharpen your skills.

If you have any questions, please check the "Questions" section to see if it has already been answered. If
it has not, then click on the question mark icon below to email us your question. It will be answered
shortly (within two business days).

55
Welcome:
Lesson 3: Part 1 - Relative Strength

One of the most important tools in a Point and Example of an RS chart from the DWA database
Figure toolbox is the relative strength chart. The
basic objective of all investors is to outperform the 9.0 ----+-+-+---------------
broad averages and the only whay to do that is to 8.5 | | |
own stocks that are outperforming the averages. 8.0 ----| | | --------------
The best way to tell whether your stock is 7.5 | | |
outperforming is to evaluate its performance 7.0 ----| | 3 --------------
relative to a market average. 6.5 | | X O
6.0 ----| | X O ------------
Relative strength calculations help investors 5.5 | | 2 5
choose between stocks that superficially appear 5.0 ----| | X O ------------
to be similar. Let's say you were evaluating three 4.75 | | 1
4.50 ----| | X --------------
stocks in the same industry group. Each stock is
4.25 | | C
fundamentally sound and the Point and Figure
4.00 ----| | X --------------
trend charts are similar. The only difference
3.75 | | X
between the three stocks is that only one has a
3.50 ----| | B --------------
positive relative strength chart. Which one do you
3.25 | | 9
choose? The logical selection would be the stock
3.00 ----| | 2 --------------
with the positive relative strength chart.
2.75 | | 1
2.50 ----| | X --------------
Relative strength charts are very long-term and 2.25 7 | C
are only updated once a week (although, you can 2.00 ----4 O 8 --------------
see a progression of the RS daily on the DWA 1.75 A O 7
site). These charts don't speak often, but when 1.50 ----8 6 X --------------
they do you should listen. In many cases, the 1.25 7 O X
market is in a condition where the defensive team 1.00 ----X O | --------------
should be on the field and you should not be 0.75 1 | |
buying stocks but moving to 100% cash doesn't 0.50 ----X | | --------------
make sense. In such markets, relative strength 0.25 X | |
really comes in handy as these charts clearly 0.00 ----A +-+---------------
show those stocks which are outperforming 9 9 9 9 0
relative to the averages even though they might 6 7 8 9 0
be declining in price. In down markets, it pays to
keep lists of stocks that are demonstrating
superior relative strength versus the broad
averages. These strong stocks will be your buy
list when the offensive team comes back on the
field. Have patience and try to make long stock
commitments only when the odds are in your
favor.

56
When looking at a Relative Strength Chart we examine the buy and sell signals as well as the current
column. A Relative Strength (RS) buy or sell signal lasts on average 2 to 2 1/2 years. A column change
can indicate performance for the next 6 to 8 months, so it is very important to watch as well.

At DWA there are currently two Relative Strength (RS) calculations to use; one the standard and main RS
versus the Dow Jones Industrial, and the other is one developed by DWA, the RS versus the sector. We
will concentrate primarily on the RS versus the Dow.

RS Reading is plotted on a PnF chart. A double top signals a positive relative strength reading and a
double bottom signals a negative relative strength reading. A RS on a "buy" signal is one that has broken
a double top and an RS on a "sell" is one that has broken a double bottom.

Positive relative strength doesn't mean the stock has to go up and vice versa. It just means it is out
performing or under performing the market. For instance, if the market goes up 15% and a negative RS
stock goes up 5%, it has under performed just as the RS chart suggested. Conversely, if the market goes
down 20% but a positive RS stock only goes down 10% then it has done as expected, performed better
than the market.

There are four potential scenarios for a PnF chart. They are as follows:

RS on a Buy signal in a column of


X's. This is the strongest reading for
an RS chart. It has been consistently
out performing and still is.

RS on a Buy signal in a column of


O's. This means the stock has been
consistently out performing, is taking a
breather.

RS on a Sell signal in a column of


X's. The stock has been under performing most of the time but currently may be on a run. This is good for
short term traders that are in and out of stocks.

RS on a Sell signal and in a column of O's. The worst of all RS conditions. Has been and still is under
performing the market.

57
Welcome:
Lesson 3: Part 1 Relative Strength (Cont.)

The stock price is divided by the Dow close and then multiplied by 1000. This formula gives you the RS
reading which is then plotted on a Point and Figure chart. This calculation is perfomed on a weekly basis
using Tuesdays closing prices.

Consider the following example. (This example is used just to show you the math.)

Your stock is trading at $80 per share and Dow Jones is We pick up the RS chart with this picture.
at the 10,000 level (numbers created for easy
calculation). To determine how your stock is trading 12.5
relative to the Dow, you would simply divide the price of 12.0
the stock by the Dow, multiply by 1000 and then plot the 11.5
resulting number exactly as you would a normal Point 11.0
and Figure chart. If we divide $80 by 10,000, multiply by 10.5
1000 we get a figure of 8. This can then be plotted on a 10.0
graph similar to the one we use for plotting the actual 9.5
price of the stock. The charting principles are the same 9.0
as when updating these charts. We first look to see if the 8.5
chart can continue in the same direction. If not then 8.0 X <-The RS plotted
check for a reversal.

Date: 2/2/??
Dow Jones: 10000
Stock Price: 80
Calculation: 80 divided by 10000 x 1000 = 8

58
A different example...

Date: 3/2/?? 9.5


Dow Jones: 11,000. 9.0
XYZ Corp: 81. 8.5
Calculation: (81 / 11000)(1000) = 7.36 8.0
7.5
7.36 as you can see is not a number on the chart but as 7.0 X <--RS plotted.
with the trend charts we either round up or round down 6.5 X
to the correct amount. 7.36 is not enough to plot 7.5 so 6.0 X
we use 7.0 5.5 X
5.0
4.5

Date: 3/9/?? 9.5


Dow Jones: 9500 9.0
XYZ Corp: 74 8.5
Calculation: (74 / 9500)(1000) = 7.79. 8.0
7.5 X <--added another X
The Dow has dropped as has the stock but the RS has 7.0 X
improved. Like the first example 7.79 is not enough to 6.5 X
fill in the 8.0 box so we mark up only to the 7.5 box. 6.0 X
5.5 X
5.0
While the stock price has fallen and the market has 4.75
fallen, the relative strength calculation has actually
moved higher. This means the stock is performing
better relative to the market.

When starting an RS chart it is just like beginning a trend chart in PnF. You must determine which
direction the chart is heading before you can plot it. For stocks that have been trading for some time you
can get a history of the stock price and Dow and do your own calculations to determine if the RS has
been moving up or down. In the case of an IPO however, the history is not there and you must wait for
the calculations to guide you. Just keep a running list of the readings.

59
Welcome:
Lesson 3: Part 2 - Examples

Let's look at an example of a Relative Strength chart with Coca-Cola (KO)


Clearly KO has under performed since the RS sell 9.5 | | X | |
signal on 1/12/99. The current reversal up to X's is 9.0 ----8 +-6 O +--------
a positive sign but an RS reading of 6.5 would be 8.5 7 O X O |
required for a Relative Strength buy signal. 8.0 ----5 O X 9 +--------
7.5 A 9 O |
January 12, 1999 7.0 ----B +---1 <--1/12/99
KO : 65.438 6.5 C | 3 |
DJIA: 9474.68 6.0 ----X +---6 B -------
5.5 B | 8 X O
5.0 ----8 +---9 X O 5 ---
June 19, 2000 4.75 4 | A | 3 X
KO: 54.438 4.50 ----X +---+-+-O X ---
DJIA: 10557.83 4.25 A | | | O
4.00 ----8 +---+-+--------
Performance from January 12, 1999 to June 19, 3.75 5 | | |
2000 3.50 ----B +---+-+--------
KO: -16.8% 3.25 A | | |
DJIA : +11.4% 3.00 ----X +---+-+--------
2.75 7 | | |
2.50 ----X +---+-+--------
2.25 X | | |
2.00 ----4 +---+-+--------
1.75 | | | |
0.25 8 9 9 9 9 9 0
0.00 --5 7 +-8 9 +-0 -----

Remember back to the very beginning in "Attributes of a chart" the description of the numbers and letters
in the columns of PnF chart - 1,2,3 or A, B, C? They designate the first action of a given month. We use
the same numbers and letters in a RS chart. They serve as useful guides to help you determine how a
stock was performing at a given time. With so little action on RS charts often there is no action during a
given month. Below are a couple of examples of RS charts along with their trend charts.

Some Examples:

60
Wal-Mart Stores (WMT).
The attributes of the chart are marked to correspond to the RS chart.

Trend chart for WMT. Relative Strength Chart for


WMT

7.5 | | | |
7.0---+-+-+---+------
6.5 | | | |
6.0---+-+-+---X ----
5.5 | | | C O
5.0 --+-+-X --X O ---
4.75 A | X O A 2<-Feb
4.50 -X O X O X -----
4.25 X O X 5 X
4.00 -X 4 X 8 +------
3.75 X 5 X |
3.50 -X 8 X --+------
3.25 X 1 X |
3.00 -C A X --+------
2.75 X 1 X |
2.50 -+-A 4 --+------
2.25 | C X |
2.00 -+-1 X --+------
1.75 | O | |
1.50 -+-+-+---+------
1.25 | | | |<-Year
1.00 -+-+-+---+------
0.75 | | | |
0.50 -+-+-+---+------
0.25 9 9 9 9 | 0
0.00 3 7 +-9 +-0 ---

You will notice that WMT for 1999 was trading above its BSL which you will remember as
bullish.

Look at the RS chart for 1999 and you will see that in May (5) the RS reversed down, it was
under performing the market, and stayed that way until October (A) when it reversed up.
61
Now look at the trend chart. Find the A for October in 1999 and you will see that the chart
breaks a triple top and continues up. The RS indicated that WMT would out perform the market
and we see on the trend chart that it did in fact do well.

Look at the RS chart for 2000 where in February (2) it has again reversed down.
On the trend chart we see that WMT actually started to break down in January (1) of 2000.
Now look at the trend chart. Find the 2 for February in 2000 and you will see that the chart
breaks down again and violates its bullish support line.

Here are the calculations for the WMT RS.


You can immediately see that the RS chart does not move like 7.5 | | | |
7.0 -+-+-+---+----
the trend chart. It is much slower. Highlighted are the months as 6.5 | | | |
above. The trend chart above only lists part of 1999 to current. 6.0 -+-+-+---X ---
5.5 | | | C O
Date Value 5.0 -+-+-X --X O --
03/14/2000 4.867 4.75 A | X O A 2<-*
03/13/2000 4.756 4.50 -X O X O X ----
03/10/2000 4.847 4.25 X O X 5 X
03/09/2000 4.920 4.00 -X 4 X 8 +-----
03/08/2000 4.902 3.75 X 5 X |
03/07/2000 4.874 3.50 -X 8 X --+-----
03/06/2000 4.879 3.25 X 1 X |
03/03/2000 5.076 3.00 -C A X --+-----
03/02/2000 4.993 2.75 X 1 X |
03/01/2000 4.853 2.50 -+-A 4 --+-----
02/29/2000 4.807 2.25 | C X |
02/28/2000 4.620 2.00 -+-1 X --+-----
02/25/2000 4.487 1.75 | O | |
02/24/2000 4.422 1.50 -+-+-+---+-----
02/23/2000 4.633 <--The reversal down (*) 1.25 | | | |
02/22/2000 4.694 Plotted as 4.75 because 1.00 -+-+-+---+-----
02/18/2000 4.672 4.672 is not enough for 0.75 | | | |
02/17/2000 4.672 4.50 which would be the 0.50 -+-+-+---+-----
02/16/2000 5.006 next box down. 0.25 9 9 9 9 | 0
02/15/2000 5.301 0.00 3 7 +-9 +-0 ---
02/14/2000 5.502
02/11/2000 5.420 In order for WMT to reverse
02/10/2000 5.396 up on its chart it would have
02/09/2000 5.386
to move as high as 6.00.
02/08/2000 5.407
02/07/2000 5.060 Looking at the calculations on
02/04/2000 5.136 the left you will see that WMT
02/03/2000 5.300 is improving but not enough
02/02/2000 5.305 for a reversal up. If the market
02/01/2000 5.315
continues to wan while WMT
strengthens we could see a
reversal up in the RS.

here is the DOW chart for some of 1999 and 2000. Compare this
with the WMT RS chart.

62
7.5 | | | |
7.0 -+-+-+---+------
6.5 | | | |
6.0 -+-+-+---X -----
5.5 | | | C O
5.0 -+-+-X --X O ---
4.75 A | X O A 2<-*
4.50 -X O X O X -----
4.25 X O X 5 X
4.00 -X 4 X 8 +------
3.75 X 5 X |
3.50 -X 8 X --+------
3.25 X 1 X |
3.00 -C A X --+------
2.75 X 1 X |
2.50 -+-A 4 --+------
2.25 | C X |
2.00 -+-1 X --+------
1.75 | O | |
1.50 -+-+-+---+------
1.25 | | | |
1.00 -+-+-+---+------
0.75 | | | |
0.50 -+-+-+---+------
0.25 9 9 9 9 | 0
0.00 3 7 +-9 +-0 ---

WMT outperformed the Dow


from October (A) until
February (2). If WMT is under
performing a chart that is
breaking down this is bad
news for the stock. Look back
up to the WMT trend chart
and you will see that it
continued to break down
through March.
You can see on the chart the Dow started to break down in
February .

63
Welcome:
Lesson 3: Part 2 - Examples

Let's walk through a trend chart and its RS chart over the course of a year.

Trend Chart RS Chart

5.5 |
5.0 ----A
4.75 8
4.50 ----7
4.25 6
4.00 ----X
3.75 C
3.50 ----X
3.25 6
3.00 ----3
2.75 C
2.50 ----7

The RS and trend chart mirror each other in that they each
were moving up. The market at the same time had been
moving down.

6.5 | |
6.0 ----+-+-
5.5 | |
5.0 ----A +-
4.75 8 O
4.50 ----7 O
4.25 6 O
4.00 ----X B <--November
3.75 C O
3.50 ----X C
3.25 6 O
3.00 ----3 O
2.75 C O
2.50 ----7 +-

Here the RS shows that for what ever reason this stock
was not keeping up with the improving Dow. The poor
trend chart was confirmed by the RS chart.
In November, the RS reverses down
and the trend chart shows a noticeable
difference as it starts to break down.
The market during this time was starting
to improve and had given a couple of
buy signals.

64
6.5 | |
6.0 ----+-+-
5.5 | |
5.0 ----A +-
4.75 8 O
4.50 ----7 O
4.25 6 O
4.00 ----X B <--November
3.75 C O
3.50 ----X C <--December
3.25 6 O
3.00 ----3 O
2.75 C O
2.50 ----7 +-

The RS had reversed down in November (B) telling us that


the stock was to under perform the market. Look what the
trend chart did in December (C). It collapsed - by the way,
do you know what pattern that is?

The market during this time from November to December


had climbed from 10,600 to 11,400 - improving
considerably. The RS for this stock showed that it was not
keeping up with the accelerated rate of the Dow

6.5 | |
6.0 ----+-+------
5.5 | |
5.0 ----A +-----
4.75 8 O
4.50 ----7 O X --
4.25 6 O X
4.00 ----X B 3 --
3.75 C O X
3.50 ----X C 2 --
3.25 6 O X
3.00 ----3 O X --
2.75 C O
2.50 ----7 +---

The trend chart bottomed and turned around nicely giving


some buy signals in January. The market at this time
started to wain. It dropped from 11,400 to 10,600.
However, this stock continued up as did its RS into March
while the market continued down to 9,750.

65
RS Chart Example with Calculations RS Calculations February and March
6.5 | | Date Value
6.0 ----+-+---------- 03/14/2000 4.517 <--X's are added
5.5 | | 03/13/2000 4.624
5.0 ----A +------------- 03/10/2000 4.734
4.75 8 O 03/09/2000 4.458
4.50 ----7 O X <--Top X. 03/08/2000 4.210
4.25 6 O X 03/07/2000 3.981
4.00 ----X B 3 <--Plotted. 03/06/2000 4.001
3.75 C O X 03/03/2000 3.919
3.50 ----X C 2 ---------- 03/02/2000 3.677
3.25 6 O X 03/01/2000 3.811
3.00 ----3 O X ---------- 02/29/2000 3.764
2.75 C O 02/28/2000 3.904
2.50 ----7 +-------------- 02/25/2000 3.955
02/24/2000 3.592
02/23/2000 3.661
In order for another X to be added to
02/22/2000 3.688
this RS chart the figures would have to
02/18/2000 3.676
reach 4.75. The stock performed very
02/17/2000 3.775
well from 3/7/00 to 3/14/00 with the
02/16/2000 3.610
chart actually rising from 3.75 to 4.50. 02/15/2000 3.557
02/14/2000 3.701
02/11/2000 3.765
02/10/2000 3.817
02/09/2000 3.838
02/08/2000 3.725
02/07/2000 3.588
02/04/2000 3.654
02/03/2000 3.711
02/02/2000 3.681
02/01/2000 3.770

Stocks with positive relative strength have a tendency to out perform those with negative relative strength.
When making new stock commitments, try to find stocks with relative strength charts that have turned
positive within the past six months to a year. This helps ensure you have a stock with lots of life left.
Stocks whose relative strength has been positive for a long time might be close to turning negative. This
is why it is important to evaluate the relative strength chart itself rather than simply accepting a positive or
negative reading generated by a computer. Investing is still an art, not a science.

66
In this example, you can see that if
we had waited until the relative
strength chart actually declined
enough to exceed a previous
bottom and give a sell signal, it
would have been too late as we
would have missed to much of the
move. The reciprocal is true as well.
If a chart is so negative that its RS
chart shows a very long tail of O's
down we would call the first three-
box reversal back up the chart as
turning positive. Otherwise, by
waiting for the buy signal we would
miss out on too much of a move.

Some stocks are so strong that their relative strength charts go strait up in a long column of X's. For the
stock to turn from positive to negative relative strength, the chart would have to give a double bottom
break. When the relative strength chart has a long column of X's up, the underlying stock would have to
absolutely collapse to turn the relative strength chart negative by exceeding its previous bottom. In this
case, we will pay very close attention to the first three-box reversal in the RS chart. In fact we would
consider it negative until the RS reverses back up. In the case of long columns we act without an actual
signal. It simply makes common sense.

Human nature causes us to hang on to any thread of hope that the stock we bought was the right one.
Once all the technicals break down, we tend to look to the fundamentals to bail us out. It has happened
all too often. Even if you feel a stock is now a "good value" - don't hold your breath. A stock can stay a
"good value" by not moving or, worse, drop another 10 points. Rather than take a loss, most investors will
hold on for the long term in the expectation the stock will come back. This mentality enables the investor
to maintain a portfolio of losers by ignoring the losers and taking profits in the winners. Let profits run not
losses.

Let's say you bought a stock at $30 in the software sector. Over time, the stock declines to $24 and the
relative strength chart turns negative. Rather than sitting with the stock and wishing it back up, why not
find another stock around the same price in the same industry that has recently turned positive on its
relative strength chart and is both fundamentally and technically sound? Sell the bad one and buy the
good one. You have a much better chance of getting your money back with the good stock. Always re-
evaluate your stocks whenever there is a change in direction in the RS chart.

As with all the lessons reading Tom's book along side will add some valuable information.

67
Welcome:
Lesson 3: Wrap Up

Relative strength is a calculation used for all stocks and indexes. One of the most important aspects of
analyzing a chart is to know how it compares to the performance of the market. Naturally, you want to
outperform the market and continually improve your chances at doing so.

The RS calculations have proven successful towards this goal. Even sectors must out perform or under
perform the market at some point. Stacking odds in your favor; if the market is bullish, the sector you are
invested in is out performing the bullish market and the stock you are invested in is out performing the
sector that is out performing the market.... that is stacking the odds in your favor. We will cover Sector
Relative Strength in Lesson 5.

Lesson 3 Contents:

Part 1: Relative Strength Part 2:


Evaluating Coca-Cola Example
Potential Scenarios Wal-Mart Example
Formula Various Examples

We will now test you to find your comprehension of the subjects discussed in Lesson 3

68
Testing for Lesson 3: Relative Strength.

1-3) Complete the formula for the Relative Strength reading by selecting the correct entry for each
of the fields.

-Select One- - Select One - - Select One -


( / )( ) = RS Reading

4-7) Answer the following with yes or no.

a. An RS on a "buy" signal can be in a column of O's yes no


b. Positive relative strength means the stock only goes up yes no
c. An RS on a buy signal and in a column of X's is the strongest reading for an
RS chart yes no
d. RS on a sell signal in a column of O's is a great stock to mortgage your
house, take a personal loan, max your credit cards to put your whole life yes no
savings into

8-11) Calculate the RS reading for each of the following:


(Numbers rounded to the third decimal.)

Dow Jones: 10500 Dow Jones: 10200


Stock Price: 102 Stock Price: 90
RS Reading: - Select One - RS Reading: - Select One -

Dow Jones: 11000 Dow Jones: 10500


Stock Price: 30 Stock Price: 29
RS Reading: - Select One - RS Reading: - Select One -

12-19) Determine the RS risk for the following stocks:


Relative Strength Chart Trend Chart
Stock 2.75 X 25 ------------------- ---
#1
2.50 O X O ----------- 24 X
2.25 O 1 O X 23 X X O
2.00 O X 3 2 O ------- 22 X X O X O
1.75 O X 5 1 O 21 X O X O X O
1.50 A 7 X 5 ------- 20 -X ------X O X O X -----Med
1.25 9 X 19.5 X O X X O X O 7
1.00 3 ----------- 19.0 X O X O X O --O X ----
Evaluate the RS chart. 18.5 X O X O X O X *
Choose one 18.0 X O --O ------O * ----

Given the RS information only,


would you buy this stock here?
Choose one

69
Stock 3.75 2 | | 34
#2
3.50 --X O --+-------- 33 X
3.25 X O 7 | 32 X O X
3.00 -A 6 X O 7 ----- 31 * X O X
2.75 | 9 X O X 30 --* 4 --X --7 O X --
2.50 --+-3 --C X ----- 29 X O X O X O * Med
2.25 | | 1 28 X X O X O X *
2.00 --+-+---+-------- 27 X O X O 5 *
1.75 26 X O 3 *
25 --O X --* ----------
24 O X * Bot
23 O *
Evaluate the RS chart. Given the RS information only,
Choose one would you buy this stock here?

Choose one

Stock 3.00 --| | --| ------ 31 X X


#3
2.75 8 | | X 30---------X O ----X O ---
2.50 ---7 O 7 | 6 -- 29 X X O X O
2.25 6 O 6 O X 28 X O X O X O Med
2.00 ---4 9 4 O X -- 27 X O X O X X O
1.75 X A 1 8 26 6 O O X O X
1.50 ---X O X | ------ 25 O X ----O X O X ----
1.25 7 O X | 24 O X O 7
1.00 ---| O --| ------ 23 O X *
22 O *

Evaluate the RS chart. Given the RS information only,


Choose one would you buy this stock here?
Choose one

Stock 2.50 ----| | | | 3 --- 28 X


#4
2.25 | | X | X O 27 X O
2.00 ----X | X O 2 O - 26 X O
1.75 B O C O X 5 25 ---------6 --X O X -
1.50 ----X O X 3 X --- 24 * X O 7 O X Med
1.25 X O X B 23 * X O X O X
1.00 ----5 2 | | ----- 22 X * X O X O
0.75 X | | | 21 X O * X O X
20 X O --* X O X -----
19.5 X O X X O X
19.0 X O X O X O ----* -
18.5 O X O X *

Evaluate the RS chart. Given the RS information only,


Choose one would you buy this stock here?
Choose one

Score Test

70
Welcome:
Lesson 4: Introduction

Now we will talk about the market. The PnF indicators are our main In this section we will list any
tools for assessing risk in the market place. In this chapter all of the upcoming live online classes
different indicators will be reviewed. In this section you will get answers specifically covering this chapter.
to many investment questions. How does one determine when risk is
high or low? When do I lock in some profits? What are some strategies Message Board
for managing risk? Can the market be timed? Is there a way to know?
You will be able to assess the risk in the market and how best to take
advantage or protect yourself accordingly.

Lesson 4 Contents:
Part 1: NYSE Bullish Percent Part 2: Bullish Percent Charts
Market Timing OTC Bullish Percent
Attributes of a Bullish Percent Chart Optionable Bullish Percent
NYSE Bullish Percent Risk Levels. 10 Week Moving Average
Historical NYSE BP Chart High Low Index
Dow Jones 20 Bond Average

Test yourself at the end of the chapter to sharpen your skills.

If you have any questions, please check the "Questions" section to see if it has already been answered. If
it has not, then click on the question mark icon below to email us your question. It will be answered
shortly (within two business days).

71
Welcome:
Lesson 4: Part 1. NYSE Bullish Percent

Technical Indicators

The Myth About Market Timing.


You have heard for years that market timing can't be done. The market averages a return of about 12% a
year and to try and do better is just a frugal attempt. The buy and hold strategy is the best for long term
investors. There's more to it than just buy and hold as we will explain and you've probably come to realize
on your own.

Best Days vs Worst Days.


Consider the following argument put forward by the Buy and Hold proponents.
If you missed the ten best days in the market from '90-'98, your returns would be 140% versus a buy and
hold strategy of 248%. The other half of that story is if you missed the ten worst days during that same
period, your returns were 473%. Since the best days and the worst days often happen near one another,
we looked at missing the 10 best and 10 worst days. Excluding those days your return was 261%!

Market Timing Does Work.

"In order to be a successful risk management investment strategy, market timing does not have to be
perfect. Despite belief to the contrary, market timing does not target getting in and out of the market at the
absolute bottoms or tops. It does, however, strive to get an investor's funds out of the market before a
major bear market devastates the portfolio. Market timing's first and foremost priority is the preservation
of capital."

Source: "Lasting Wealth is a Matter of Timing" by Sosnowy

Do You Feel Lucky?


The assumption of the often quoted Buy and Hold studies is that you won't need your money for 50 years
or more. These studies assume you aren't buying a home, sending children to college or retiring in the
next 50 years. A more important question is...
"Where are you getting on the investment train?"
If you got on the train at the beginning of the 1973-1974 Bear Market, it took 7.6 years to get back to
even.
Do you have 7.6 years to spare? Do you not need your money for 7.6 years?

NYSE Bullish Percent:


We use the Bullish Percent indices to assess risk in the market.

The concept began in the 1940's but it wasn't until 1955 that A.W. Cohen actually created the NYSE
Bullish Percent. We often refer to this indicator as our main coach for NYSE stocks. It tells us whether to
have the offensive or defensive team on the field. X's mean offense and O's mean defense. This indicator
tells you who has the ball. Based on a University of Chicago study 80% of the risk in any stock is based in
the market and the sector. However, they found that most people spent 80% of their time on stock
selection. The NYSE Bullish Percent provides the insight needed in determining the risk in the market.
The more you learn about this indicator, the more confidence you will have in your day to day operations
in the market.

If the overall market is not supporting higher prices, very few stocks you own , if any, will do well. In a
football game, two sides operate on the field at any one time, offense and defense. The same forces act
in the marketplace. There are times when the market is supporting higher prices. When the market is
supporting higher prices, we can say that you have possession of the ball. You have the offensive team
on the field. When you have the ball, your job is to take as much money away from the market as
possible; this is the time you must try to score. During times when the market is not supporting higher
prices, you have in essence lost the ball and must put the defensive team on the field. During such

72
periods, the job of the market is to take as much money away from you as possible. Think for a moment
about your favorite football team. How would they do if they operated only with the offensive team in
every game? They might do well when they had possession of the ball, but when the opposing team had
the ball, your team would be scored on at will. The net result is your season would be lackluster at best.

This is the problem most investors have: They don't know which team is on the field, much less where the
game is being played. The NYSE Bullish Percent clearly signals when the environment is ripe for offense
or defense.

The NYSE BP is simply a compilation of the percent of stocks that trade on the NYSE on Point and
Figure buy signals. If you simply thumbed through all the Point and Figure chart patterns of the stocks on
the NYSE and counted the ones that were on buy signals, then divided by the total number of stocks
evaluated, you would have the NYSE Bullish Percent reading. DWA calculates all of this in their database
and displays the charts for you, however, it is important to know how they are calculated.

Let's say for instance, there were 2,000 stocks on the NYSE and 1,000 of them were on Point and Figure
buy signals. The Bullish Percent would be at 50% (1,000/2,000 = 50 percent). We use the same three-
box reversal to shift columns in this index as we do in the normal Point and Figure chart. Each box
constitutes 2 percent, and the vertical axis runs from 0 to 100 percent. It will take a 6% change in order to
reverse this chart.

When the index is rising in a column of X's, more stocks are going on buy signals. Changes in the index
can only come from first signals that are given by a stock, not subsequent signals. Let's say that XYZ
stock bottoms out after declining and then gives that first buy signal off the bottom. That signal turns the
stock from bearish to bullish. It is this first buy signal that is recorded. All subsequent buy signals are not
counted.

The Bullish Percent concept is unique from most market indicators because it is a one stock - one vote
indicator. The reason this is so important is that most peoples portfolios are managed on an equal dollar
weighted basis, much like a one stock - one vote. Therefore, the Bullish Percent index is a better indicator
to manage risk than a capitalization weighted index like the S&P 500. In other words, you are getting an
apples to apples comparison.

73
Welcome:
Lesson 4: Part 1. Continued

Attributes of a Bullish Percent Chart:


These are the same as with any PnF chart. The letters or numbers in the columns denote the months of
the year. Time spent in a column of X's or O's is generally a number of months, not weeks. There are no
bullish or bearish resistance lines but there are risk levels which we will go over in a moment.
It is important to know how this index works so let's go over how the index rises and falls.

Example:

Let's say there are 100 stocks trading on the NYSE. Over the next week 12 stocks experience a new buy
signal and 10 stocks experience new sell signals. The net result of the action for the week is two new buy
signals or 2 percent more stocks are on buy signals. Remember that each box on the chart represents 2
percent, so a 2 percent net change in new buy signals allows the chart to rise one box.

The only way to switch from one column to the next is through a three-box reversal. It would take a sum
total of 6 percent net buy or sell signals to cause a reversal. Remember the box sizes, in this case the
box size is 2 percent and therefore a three box is 6 percent, in either direction.

Reversing from one column to the next is tantamount to losing or gaining possession of the ball.
We use the football analogy here a lot because it helps visualize how the NYSE BP works. The "playing
field" runs from 0 to 100 percent, kind of like a 100 yard football field. Where you are on that field
determines your "field" position. The column you are in tells you if you have the footbal and the field
position tells you how much room you have to run.

74
There are two things we try to ascertain with this chart:
1 - Who has the ball?
2 - What is the field position?

The higher the index climbs, the more overbought it becomes. The lower it drops, the more oversold it
gets. When the index is rising in a column of X's, we say you have possession of the football. When you
have possession, you must run offense plays. This is your time to attempt to score against your
opponent, the stock market. When the index is declining in a column of O's, we say the market has the
ball and your job is to try to keep it from scoring against you.

If you colored the chart above the 70 percent level red and the area below 30 percent level green, these
would represent the two extremes much like the end zones of a football field.
When you are in the Green Zone, below 30% and in a column of X'syou have a lot of room to run the ball.
When you are in the Red Zone and in a column of O's you have a lot of territory to lose the ball. It isn't
often the index moves below 30% or above 70%.

Thinking about this concept in terms of supply and demand, when the NYSE Bullish Percent goes
near/below 30% the availability of supply to continue to push the market lower is severely limited. When
the NYSE BP goes near/above the 70% level, the availability of demand to continue to push the market
higher is severely limited.

75
Welcome:
Lesson 4: Part 1. Continued

NYSE Bullish Percent Risk Levels.


There are six degrees of risk in bullish percent charts. These risk levels are similar to the different signals
a traffic light can give. While we pay the most attention to whether the bullish percent index is in X's or O's
and the field position, to become a real craftsman at this methodology you need to be aware of the six
different risk levels.

1 - Bull Confirmed
2 - Bull Alert
3 - Bull Correction
4 - Bear Confirmed
5 - Bear Alert
6 - Bear Correction.

1) Bull Confirmed Market:


This risk level occurs when the Bullish Percent gives
a buy signal by exceeding a previous column of X's.

It is equally important to evaluate the relative field


position of the index. Bull Confirmed at the 70
percent level is very different from Bull Confirmed at
the 30 percent level. Bull Confirmed at 70 percent
means much more risk than Bull Confirmed at 30
percent.

2) Bull Alert Market Examples of Bull Alert:


This market occurs when the Bullish Percent
reverses up into a column of X's from below 30
percent. This index does not have to exceed the 30
percent level, simply reverse up. At the 30 percent
or lower level, many stocks are making their lows.
The actual reversal to the upside suggests most
lows have been made and the probability is up from
there. A change to this risk level is tantamount to a
red light changing to green.

3) Bull Correction Market

76
The bull market is getting a little extended at these
levels, and the market is currently digesting its
excesses. The bull trend is likely to resume shortly.
It is characterized by a 6 percent reversal down
from a Bull Confirmed status that takes place below
the 70 percent level. The next reversal back up into
a column of X's reverts the risk level back to Bull
Confirmed. Examples are below.
First... Then...

4) Bear Confirmed Market:


This market is characterized by the Bullish Percent
Index penetrating a previous bottom. Again, field
position is important to consider in this risk level.
Bear Confirmed at 30% is not as dangerous as Bear
Confirmed at 70 percent. Always keep the field
position in mind. The traffic light is red in this risk
level. If Bear Confirmed comes near 70% you
should employ defensive strategies. If the Bear
Confirmed happens near 30%, watch closely for the
first three box reversal back up to X's. See example
to the right.
5) Bear Alert Market
When the Bullish Percent drops below 70 percent
without penetrating a previous bottom Bear Alert
status occurs. Typically a reversal to Bear Alert will
bring this NYSE BP down to at least the 50% level.
In the Bear Alert market, defensive action should be
taken. Short positions can also be initiated in
technically weak stocks. An example is to the right.

77
6) Bear Correction Market.
This indicates a respite in the selling pressure. This
phase is characterized by a 6 percent reversal into a
column of X's from a Bear Confirmed status above
the 30 percent level.

78
Welcome:
Lesson 4: Part 1. Continued

Risk Levels labeled in the NYSE Bullish Percent.

Link to a historical Point and Figure Chart (database format)

We've talked a lot about using the NYSE Bullish Percent as a way to assess risk in the market. Here are
just some of the different ways one can play offense (wealth accumulation) and defense (wealth
preservation).

Offense: Defense:

79
Buy Stock Come off margin
Buy Calls Sell partial positions
Increase invested position. Tighten up stop loss points.
Sell calls against positions
Take partial positions off the table
Increase cash position
Move to more defensive issues
Buy protective puts
Short positions can be initiated

80
Welcome:
Lesson 4: Part 2. Bullish Percent Charts

OTC Bullish Percent


Many investors make Chart of the OTC Bullish Percent with risk
the mistake of trying levels:
to follow too many
indicators. The more
you follow, the more
confused you will
become. Our most
important concept is
the Bullish Percent
discussed in the first
part of this Lesson.
DWA also follows an
OTC Bullish Percent
Index because of the
plethora of high-tech,
over-the-counter
stocks we deal with
each day.

The OTC Bullish


Percent Index is a
compilation of the
percentage of over-
the-counter stocks
that are on Point and
Figure buy signals.
The chart is read the
same way as the
NYSE Bullish Percent
Index. When the
index is rising in a
column of X's, you
have the football.
Conversely, when it is
in a column of O's, the
OTC market has the
ball. The same two
lines of demarcation
exist at the 70% and
30% level.

The risk levels are


defined the same for
the OTC BP as with
the NYSE BP and
their meaning is
identical.

Important Note:
You can see here with the above chart that it isn't often the Index reaches below the 30% level except in
extreme market conditions. It is more often that it bases around the higher 30's or lower 40's. This is also
true near the 70% level. Most often the OTC Bullish Percent tops out in the 60's. When learning the risk
levels you must understand, as with all of PnF charts, that this is an art, not a science. Point and Figure is
a combination of charts and so far we have been teaching you the principles of the individual charts and
we will start to move into how to put them all together.

81
Optionable Bullish Percent
The Optionable Bullish Percent is a shorter to intermediate term indicator comprised of bigger name/cap
stocks in the NYSE and OTC that have options listed against them. There are more than 3000 stocks in
this index.

It works just like the NYSE BP and often changes in the Optionable Bullish Percent will be followed by a
change in the NYSE Bullish Percent. That is to say if the "OPTI" turns negative we watch the NYSE BP
closely to see if it is to turn negative and vice versa. The same six risk levels apply and the overbought
level begins at 70% (Red Zone) and the oversold level begins at 30% (Green Zone).

82
Welcome:
Lesson 4: Part 2. Bullish Percent Charts

OTC Bullish Percent


Many investors make Chart of the OTC Bullish Percent with risk levels:
the mistake of trying
to follow too many
indicators. The more
you follow, the more
confused you will
become. Our most
important concept is
the Bullish Percent
discussed in the first
part of this Lesson.
DWA also follows an
OTC Bullish Percent
Index because of the
plethora of high-tech,
over-the-counter
stocks we deal with
each day.

The OTC Bullish


Percent Index is a
compilation of the
percentage of over-
the-counter stocks
that are on Point and
Figure buy signals.
The chart is read the
same way as the
NYSE Bullish Percent
Index. When the
index is rising in a
column of X's, you
have the football.
Conversely, when it is
in a column of O's, the
OTC market has the
ball. The same two
lines of demarcation
exist at the 70% and
30% level.

The risk levels are


defined the same for
the OTC BP as with
the NYSE BP and
their meaning is
identical.

Important Note:
You can see here with the above chart that it isn't often the Index reaches below the 30% level except in

83
extreme market conditions. It is more often that it bases around the higher 30's or lower 40's. This is also
true near the 70% level. Most often the OTC Bullish Percent tops out in the 60's. When learning the risk
levels you must understand, as with all of PnF charts, that this is an art, not a science. Point and Figure is
a combination of charts and so far we have been teaching you the principles of the individual charts and
we will start to move into how to put them all together.

Optionable Bullish Percent


The Optionable Bullish Percent is a shorter to intermediate term indicator comprised of bigger name/cap
stocks in the NYSE and OTC that have options listed against them. There are more than 3000 stocks in
this index.

It works just like the NYSE BP and often changes in the Optionable Bullish Percent will be followed by a
change in the NYSE Bullish Percent. That is to say if the "OPTI" turns negative we watch the NYSE BP
closely to see if it is to turn negative and vice versa. The same six risk levels apply and the overbought
level begins at 70% (Red Zone) and the oversold level begins at 30% (Green Zone).

84
Welcome:
Lesson 4: Part 2. Continued

10 Week Moving Average


Also known as the Percent of 10.

One of our main short term indicators. As the name implies, this is simply the percent of stocks on the
NYSE that are above their ten week moving averages. We also have a 10 Week for the OTC.
Buy signals occur when a column of O's fall at or below 30% and then reverse to a column of X's.
Buy signals can also occur when a column of X's exceeds a previous column of X's.
Sell signals occur when the index goes above 70% and then reverses down below 70% or when a
column of O's exceeds a previous column of O's.
Being aware of the short term picture is important because often it will spill over into the long term picture.

We use this short term


indicator with the High-
Low index and we like
to see them moving in
concert with one
another.

The 10 Week moves a


lot quicker than the
NYSE BP, the OTC or
the Optionable BP
because it is a short
term indicator. This
index is of great benefit
when you are planning
your trade. Investors
should never us the 10
Week Moving Average
Index as their sole
indicator in determining
whether to make new
stock commitments.
However, traders can
effectively use it as a
market timing indicator
for short term trades. If
the main trend in the
market is up as
dictated by the NYSE
BP and the 10 Week is
on a buy signal, then
you are in a market that
is bull configured both
short and long term. In
the latter case, an
investor would be fully
invested. We will
continue with how to
put this together with
other indexes in a later
lesson.

85
High Low Index

One of the short term indicators, we use this in conjunction with the Percent of 10.
This index is calculated by taking the number of new highs and dividing by the number of new highs plus
new lows. We keep this calculation on a ten day moving average and then plot it on a point and figure
chart.
Buy signals come when the index falls to or below 30% and then reverses up, or a column of X's exceeds
a previous column of X's.
Sell signals come when the index goes above 70% and then reverses down below 70% or a column of
O's exceeds a previous column of O's,

The chart is set just like a


bullish percent chart going
from 0 to 100%. The two
critical levels are 30 and
70%. Sell signals come from
reversals above to below
70%. Buy and sell signals
can also come by exceeding
a previous top or bottom
respectively. Reversals from
above 70 percent suggest
that there is a trend change
from more stocks making
new highs to more stocks
making new lows.

The percent of 10 and the


High Low typically go in
tandem but not always.
Sometimes one lags the
other. Nothing is ever exact
in the markets. These two
indicators are our main
short term guides.

86
More on the NYSE High Low Index
(Excerpt from 10/01/99 Daily Equity Report)
Below is a table showing times when the NYSE High Low Index hit 10% and the subsequent reversal up.
As you can see, reversals up from below the 10% level have been very good signs to re-enter the market
with new positions.

Moved Dow Low Dow Upside Dow


Date
Below 10% Reading Reading Reading Reversal Reading
Mar 1980 3-6-80 828.07 0.9% 800.94 4-10-80 791.47
Sep 1981 8-31-81 881.46 2.0% 849.98 10-7-81 868.72
Jun 1982 6-7-82 804.03 5.5% 795.57 6-24-82 810.41
Feb 1984 2-17-84 1148.87 7.5% 1134.21 2-28-84 1157.14
May 1984 2-17-84 1101.24 5.3% 1124.35 6-11-84 1115.61
Jul 1984 7-18-84 1111.64 5.5% 1096.95 8-2-84 1166.08
Oct 1987 10-20-87 1841.01 0.7% 1938.33 1-4-88 2015.25
Jan 1990 1-31-90 2590.54 8.9% 2590.54 2-7-90 2640.09
May 1990 5-2-90 2689.64 9.7% 2689.64 5-7-90 2721.62
Aug 1990 8-15-90 2748.27 3.4% 2613.37 9-18-90 2571.29
Nov 1994 11-23-94 3674.63 5.4% 3746.29 12-21-94 3801.80
Aug 1998 8-31-98 7539.07 4.2% 7615.54 9-23-98 8154.41

87
Welcome:
Lesson 4: Part 2. Continued

Dow Jones 20 Bond Average:

This is our primary bond indicator. The Dow Jones 20 Bond Average is comprised of 10 industrial and 10 public utility
bonds traded on the New York Exchange. The closing price of the Dow Jones 20 Bond Average is simply plotted on
a Point and Figure chart. The box size is .20 per box. The average moves slowly and does not often give signals, but
when they occur, you must pay close attention.

Moves on this chart are typically long term and we look at buy and sell signals as well as high pole and low pole
warnings. In October 1993 and in February of 1999, the Dow Jones 20 Bond Average gave a sell signal at high levels
which suggested higher interest rates to come. This in both cases this indicator was dead on the money. We reported
in our Daily Equity Market Report to lock in interest rates on adjustable mortgages.

The rules for a High Pole and Low Pole warning apply here. A low pole warning occurs when the chart exceeds the
previous bottom by at least three O's and then reverses back to the upside and retraces the previous down move by
greater than 50%.

This is considered a buy signal. The high pole warning occurs when the chart exceeds the previous top by at least
three X's and then pulls back retracing more that 50% of the upmove. This is a sell signal.

88
Buy and Sell Signals for the Dow Jones 20 Bond Average:

May 1992: Buy Signal 99.2 Change:


October 1993: Sell Signal 105.6 +6.4
October 1993: Sell Signal 105.6 Change:
January 1995: Buy Signal 94.6 +11.0
January 1995 Buy Signal 94.6 Change:
July 1995: Sell Signal 102.8 +8.2
July 1995: Sell Signal 102.8 Change:
September 1995: Buy Signal 103.0 -0.2
September 1995: Buy Signal 103.0 Change:
March 1996: Sell Signal 103.8 +0.8
March 1996: Sell Signal 103.8 Change:
August 1996: Buy Signal 102.0 +1.8
August 1996: Buy Signal 102.0 Change:
January 1997: Sell Signal 103.0 +1.0
January 1997: Sell Signal 103.0 Change:
June 1997: Buy Signal 102.6 +0.4
June 1997: Buy Signal 102.6 Change:
February 1999 Sell Signal 106.0 +3.5
February 1999: Sell Signal 106.0 Change:
February 2000 Buy Signal 96.4 +9.6
February 2000 Buy Signal 96.4 Change:
March 2000 Sell Signal 95.6 -.8.0
March 2000 Sell Signal 95.6 Change:
June 2000 Buy Signal 94.6 + 1.0

89
Welcome:
Lesson 4: Wrap Up

In this chapter you have been introduced with all of the main indicators; the NYSE BP, the Optionable BP,
the OTC BP, Percent of 10, High Low Index and the Dow Jones 20 Bond average. The NYSE BP and
OTC BP are our Main Coachs, our guide to whether we are offensive or defensive in the market. They
look ahead and are the first thing we consider when investing. The short term indicators determine our
trade positioning, whether to cover or initiate new positions.

In a later chapter you will see how all of these work together to determine long term and short term risk
and how to position yourself in these different types of markets.

Lesson 4 Contents:
Part 1: NYSE Bullish Percent Part 2: Bullish Percent Charts
Market Timing OTC Bullish Percent
Attributes of a Bullish Percent Chart Optionable Bullish Percent
NYSE Bullish Percent Risk Levels. 10 Week Moving Average
Historical NYSE BP Chart High Low Index
Dow Jones 20 Bond Average

We will now test you to find your comprehension of the subjects discussed in Lesson 4.

90
Testing for Lesson 4: Technical Indicators.

1) Which indicators are Short term or Long term?

a. OTC Bullish Percent Long Term Short Term


b. Optionable Bullish Percent Long Term Short Term
c. NYSE Bullish Percent Long Term Short Term
d. 10 Week Moving Average Long Term Short Term

2) Which indicator is not a percentage?

NYSE BP

10 Week M.A

Dow Jones Bond Average

High-Low Index

Optionable BP.

3) Answer the following yes-no questions.


a. If a stock continues to move down after it has given a sell signal does that affect the
NYSE BP? yes no
b. If a stocks RS gives a new sell signal does that count as one vote towards the NYSE
BP? yes no

c. The 10 Week moving average is much more sensitive than the Optionable BP yes no

d. The Red Zone begins at the 60% level yes no

e. The NYSE BP is considered over bought above the 50% level yes no

f. It isn't often the NYSE BP moves below 30% or above 70% yes no
g. One type of buy signal occurs when a column of O's fall at or below 30% and then
reverse to a column of X's. yes no

4) The two lines of demarcation are:

30%-70% 40%-60% 20%-80% 25%-75% 10%-90%

91
5) Match the following:
a - There is a lot more upside than down side. Open field.
30% b - More stocks on PnF buy signals but the field position isn't good.
c - I don't like football.
50%
d - Most people are already in that want to buy, risk level is high.
60% e- Middle of the field and considered good position.

70%

6) What is the percent change needed to reverse columns on the Bullish Percent charts?

3%

Changes with the field position

6%

Depends on the box scale.

Risk Levels:
7) Match the Risk levels with the description and chart.
Bull Confirmed Market Bear Confirmed Market

Bull Alert Market Bear Alert Market

Bull Correction Market Bear Correction Market

1 This market is characterized by the Bullish Percent Index penetrating a previous bottom.
2 This market occurs when the Bullish Percent reverses up into a column of X's from below 30% level.
3 When the Bullish Percent drops below 70% without penetrating a previous bottom
4 When the Bullish Percent gives a buy signal by exceeding a previous column of X's.
5 It is characterized by a 6 % reversal down from a Bull Confirmed status that takes place below the
70% level.
6 This phase is characterized by a 6% reversal into a column of X's from above the 30 % level from a
Bear Confirmed status.

Score Test

92
Welcome:
Lesson 5: Introduction

We've covered the overall market with the Bullish Percents and now we In this section we will list any
look at the individual sectors that are comprised of the securities. As upcoming live online classes
with the market, it is important to understand all of the risk under which specifically covering this chapter.
a particular stock is operating. Here we discuss how the sectors
operate, how to evaluate them and how they are performing compared Message Board
to the market.

Lesson 5 Contents:
Part 1: Sector Bullish Percents. Part 2: Sector Relative Strength
Perfect Market Timing vs Perfect Sector Timing Sector Relative Strength
DWA Individual Sectors. Intel Example
Sector Bell Curves Sector (Index) RS Chart
Examples DWA Sector Index RS Charts

Test yourself at the end of the chapter to sharpen your skills.

If you have any questions, please check the "Questions" section to see if it has already been answered. If
it has not, then click on the question mark icon below to email us your question. It will be answered
shortly (within two business days).

93
Welcome:
Lesson 5: Part 1 - Sector Bullish Percents.

Perfect Market Timing vs Perfect Sector Timing.

Buy & Hold: Bought the S&P 500 and held through the good times and the bad times.
Market Timing: Took money out of the S&P before there was a down month and put it back in just
before a positive month.
Sector Timing: Bought the best performing sector at the beginning of the year.

Sector analysis is one of the most important yet Watch magazine covers carefully. The next time you
least analyzed parts of the market. We place are in the airport look at the magazine rack and see
tremendous emphasis on sector rotation in our daily if you can find a widely read magazine that makes a
work. Probably 80 percent of the risk in a stock is major statement on its cover about some sector of
the market and sector. Stock prices do not move the market - something like "The Banking Industry Is
without rhyme or reason. These moves tend to be Dead". If you find one, buy the magazine and keep
orchestrated. it. Normally, the trend in that sector will continue to
move for a couple of months in the direction the
A good analogy would be the picture of wildebeest cover describes. Give that sector 8 months, and you
romping across the African plains, moving in unison will find its behavior is the exact opposite of that
first in one direction and then another, but the suggested on the magazine cover. The reason for
majority go together. Sectors operate the same way. this is that the cover stirs Mr. Jones and Ms. Smith
Wall Street tends to follow the herd. First one into action and while all the Jones and Smiths are
analyst raises the earnings expectation, then the busy reacting, the sector moves in the forecasted
rest follow and before you know it, the sector is in direction. Once these investors are in and the door
play. slams behind them, there is no more buying or
selling pressure (whichever the cover suggests) left
As the sector moves up, other institutions see the to sponsor the sector. The forces of supply and
move and climb on board. Eventually the demand begin to change, and the sector takes the
opposite track.
mainstream financial periodicals catch wind of a
major move underway and begin to write articles
about how the industry has made a turnaround and You must remember, to be successful in the stock
should have clear sailing ahead. This draws market you must look ahead: What is happening in
investors in just in time to catch the top. By the time the market today has already been discounted
the articles appear in magazines about how great many months ago. When evaluating sectors you
the industry is, almost everyone is in that wants to must be a contrarian. You must find the courage to
be in. The last group is the unsuspecting public, buy stocks in sectors that are out of favor. You must
who use newspapers and magazines as their avoid the crowd, go the opposite direction. This is
primary source of stock market research. extremely difficult as it goes against human nature.

Remember that prices move as a direct result of Sector rotation is one of the most important parts of
supply-and-demand imbalances. If there are no our daily operation. We follow 43 sector Bullish
more buyers left to cast their vote, supply by Percent Charts. The same principles used with the
definition must take the upper hand. The sector then market bullish percent charts applies to the Sector
begins to lose Sponsorship, and the whole process Bullish percents. The same 30% and 70% levels
begins again only in reverse this time. apply to sectors as well as the six different risk
levels. Ideally, each sector bullish percent should
have at least 100 stocks in it. You will also notice
that some sectors tend to move to greater extremes
than the NYSE Bullish Percent.

94
Individual sectors.
Here are the sectors currently covered at DWA:
This list is pulled from the DWA database.

Aerospace Airline Forest Prods/Paper Restaurants


Asia Pacific Gaming Retailing
Autos & Parts Healthcare Savings & Loans
Banks Household Goods Semiconductors
Biomedics/Genetics Insurance Software
Building Internet Steel/Iron
Business Products Latin America Telephone
Chemicals Leisure Textiles / Apparel
Computers Machinery and Tools Transports / Non Air Bull Alert
Drugs Metals Non Ferrous Utilities / Electri
Electronics Oil Utilities / Gas
Europe Oil Service Wall Street
Finance Precious Metals Waste Management
Foods Beverages/Soap Protection Safety Eq
Real Estate

We will not review each sector bullish percent chart one by one, however, it is important that you take the
time to look at them. By evaluating each of these charts you will learn the nuances of each sector. Again
this is the "art" of the methodology. Some like the internet have wild swings to chart extremes while
others like the drug sector seem to move in a more confined area. Understanding this, knowing where a
sector typically tops or bottoms, helps you to better evaluate the risk in a particular sector.

95
Welcome:
Lesson 5: Part 1 - Continued

Sector Bell Curves:

The tables below are used to help us depict the overbought or oversold nature of the sector bullish
percent charts. The horizontal scale runs from less than 10%(oversold) to greater than 90% (overbought).
We simply place the sector symbol above the point on the horizontal scale which correlates to its bullish
percent chart. If a sector is on the far right side it is overbought and if it is on the far left side it is oversold.
Below are some "time shots" of these curves.
Dow Industrials in the 2350 area and making all-time highs

96
It is when the Bell curve is skewed to the right that everyone who wants to be in the market is in and there
isn't much opportunity left. This is when things look the best but really it is when caution is warranted.

The charts above show all the sectors in Uppercase letters. DWA created this method to easily show
which sectors are moving up or down, are in X's or O's; Uppercase for those sectors moving up and
Lowercase for sectors moving down (not shown in the Bell curves above).

You can look up the sector Bell Curve if you have the professional subscription at DWA under the
"Reports and Sector Area" link. For the individual investors, DWA posts the Sector Bell curve in the "From
the Analyst" section when there are important changes or updates.

97
Welcome:
Lesson 5: Part 1 - Continued

Let's look at a few charts to give the example.

Internet Sector (BPINET)

Notice the large swings in this


sector from above 80% to
below 20%. This particular
sector covers the whole field.
This action is not typical of
the sector bullish percents.
This is why it is imparative
that you evaluate and "get a
feel" for each of these charts.
Or at least the ones you are
interested in.

Note:
With respect to the Bell
Curve, this sector would be
listed on the left hand side,
below the 30% level and in
lower case (because the
sector chart is in O's).

98
Drug Sector (BPDRUG)

Notice this sector typically


moves between the high 30's
and mid 60's. It has in its
history moved below 30%,
which proved to be a great
entry. Only in the years '91
and '92 did it move above
70% (not pictured).
Therefore, we consider the
"over bought" area for this
particular sector to be in the
60's and the low 30's would
be considered the "over sold"
area.

Note:

With respect to the Bell


Curve, this chart would be in
the middle of the curve, at
50%, and in Uppercase
letters because the chart is in
X's.

Take time to look at the different sectors to see where they top and bottom out and where opportunity
lies. At this writing, the market has taken a major slide and the Sector Bell Curve has been effected. Most
of the sectors are below the 50% area telling us that the market is now over sold. We look for sectors to
reverse up from these low levels and to find opportunity in stocks that are housed in those sectors. You
will see the Uppercase and Lowercase letters in this example.

99
Welcome:
Lesson 5: Part 2 - Sector Relative Strength

Sector Relative Strength is a great tool to use when trying to determine which sectors are outperforming
the market. Given the fact that the Sector is one of the greatest contributors to price fluctuation in a stock,
it is extremely important to determine its relative strength. Those sectors exhibiting positive relative
strength (ones in a column of X's on their RS chart) are the ones to focus on.

Relative Strength is a term we use extensively and place great importance. Many of you are very aware
of its definition and importance pertaining to stock selection, but sector relative strength is a vital
component when determining which sectors are likely to perform the best. During times of market
uncertainty, Sector RS takes on a particularly significant role. It is at these times that you should be
paying close attention to those sectors which are exhibiting strong relative strength - that is, are showing
that they are "out performing" the market.

Sector Relative Strength measures how a particular sector is doing compared to the market in general.
The Relative Strength calculation is simply done (using Tuesday evening closing data that is available
automatically through DWA) by dividing the price of the sector by the price of the S&P 500 (SPX), and
then multiplying by 100.

This number is then plotted on a point and figure chart. As with any PnF chart and as you have seen in
the previous lesson on stock relative strength, buy signals are given when a column of X's exceeds a
previous column of X's. Sell signals are given when a column of O's exceeds a previous column of O's.

But of equal importance for Sector RS is what the most recent column is on the RS chart.

When a sector index reverses up into a column of X's on its RS chart, we consider that a "Buy"
signal.

When a reversal up occurs, it is a sign that you should be considering it to initiate positions. Don't forget
that there are other factors to consider such as risk in the general market and the chart of the individual
stock. A reversal down on the sector RS chart is considered a negative and this would not be a sector to
consider intiating positions in. If long stocks in these sectors it is time to evaluate them and make sure
that appropriate stop loss points are in place.

The Nuances of Navigating this market.


Using the sector RS.

At DWA we constantly strive to present you with quality advice and research. We are always working to
become better at using our time-tested market and sector indicators, and are continuously striving to
develop new tools to help us navigate the market, and therefore advise you accordingly. But just as
important as our development, is your development with using the tools we give you. This is where
education comes into play. We also wanted to alert you to all the different tools we have developed to
help determine which are the best sectors on a relative strength basis. Below we discuss the basic
concepts of sector relative strength and how it is calculated. Then we highlight the different tools available
to you on the DWA Internet site that can help identify a sector's relative strength compared to the overall
market.

Sector Relative Strength is a great tool to use when trying to determine which sectors are outperforming
the market. Given the fact that the Sector is one of the greatest contributor to price fluctuation in a stock,
it is extremely important to determine the relative strength. Those sectors exhibiting positive relative
strength (ones in a column of X's on their RS chart) are the ones to focus on.

100
Welcome:
Lesson 5: Part 2 - Continued

The sectors which we follow RS readings for are listed below. You can access this data on the DWA site
by clicking on the "Indices" link in the bottom-left quadrant. Then click on the "Sector" link at the top of the
page and this will bring up the list of sectors and will show a column that says "RS vs. SPX". On this
same page will be a list of our DWA Equal Weighted Sector Index Relative Strength readings. We
developed these DWA indexes, (and RS charts for them), to give you a broader view of how a sector is
performing on a relative strength basis. The RS charts for the cap-weighted SOX and the DWA
Semiconductor index will more often than not tell the same story, but these DWA Sector RS charts will be
especially helpful for those sectors which don't have an exchanged based sector index, such as the
Media group, or Restaurant sector.

Again when using these RS charts, you want to focus your buying (or owning of stocks) in those sectors
which are in a column of X's on their RS chart - they are the ones which are outperforming the market.
This tool is extremely important to use when the sector bullish percent may be close to a reversal down. It
will help keep you in at least partial positions of stocks that reside in strong RS sectors, rather than
dumping the whole position out if the sector bullish percent reverses down into O's.

Let's use Intel (INTC) as an example. The Semiconductor bullish percent reversed down from high levels,
but the relative strength for the sector has not waned at all. On all measurements, the RS for the
Semiconductor group remains very strong. So if you owned INTC, instead of selling out the entire
position, you would have been better off to only trim the position, keeping some exposure in the group
due to the strong RS reading of the sector. Again, remember the concept is to outperform, and we think
the best measurement for this is RS.

Now let's go over some of the other tools that are at your disposal that can help you try to get a handle on
sector relative strength. There are two other forms of charts we keep that can give you insight into sector
relative strength, or the underlying strength of the stocks which make up a given sector.

We have developed a chart that will show you the Percent OTC stocks whose RS is in X'S
percent of stocks in a given sector, or for that matter (RSXOTC )
given market class - NYSE, Optionable Universe or
OTC, which are in a column of X's on their RS 58 | | |
charts. We plot this percent like we do our other 56 | | |
bullish percents, from 0% to 100% using a 6% 54 | | |
reversal to change columns. To the right we show 52 | | 3
you one of these charts on the OTC market. This 50 ------------+-+---X O---
chart shows you the percent of OTC stocks which 48 X | | X O
are in a column of X's on their RS charts. You can 46 X O | 2 O
see the weakness in March and April wit the percent 44 A O | 1 O
od stocks in this universe falling from 52% to a low 42 X C | X O
of 28%. 40 ------------O +---C O---
38 5 | B 4 7
36 6 | A O X
34 8 X 9 O 6
32 O 1 O 7 O X
30 ------------9 C O X O-X-
28 O X 4 X O
26 A X O |
24 O | |
22 | | |
20 ------------+-+---+--------
18 | | |
16 | | |

101
Look at the RSXNYSE chart (those stocks on the Percent of NYSE stocks whose RS is in X's
NYSE which are in X's on their RS charts). At the (RSXNYSE)
time the OTC RSX chart was reversing down this
chart reversed up. A clear sign of the divergence we 48 | |
saw in these to markets after the first quarter of 46 | |
2000. 44 | |
42 B |
40 ----------X O ------
38 A O
36 X 5
34 | 6
32 | 7 X
30 ----------+-8 6-----
28 | 9 5
26 | O 3
24 | A X
22 | 3 X
20 ----------+-4-----
18 | |
16 | |
14 | |
12 | |

We take it a step further and keep a chart that Percent of stocks on an RS buy signal.
shows the percent of stocks in a given group that Using the Semiconductor Index (RSPSEMI)
are on an RS buy signal. These charts we denote
with RSP then the first four letters, such as 60 ------------+-----
RSPSEMI or RSPOTC. Both of these indicators are 58 |
longer term however, this indicator takes longer to 56 | 1
develop. The RSX tool will be a bit more 54 | X
52
"responsive" or "active", while the RSP will be a little A | C
slower because the RSP chart is the percent of 50 ----------X O X ----
stocks on an RS buy signal, and as you know it 48 9 O B
takes longer to give an RS signal change, than to 46 X C X
just reverse up or down on stocks' RS chart. The 44 X O A
RSX and RSP charts can be found under the link 42 X O X
entitled "DWA Technical Indicator Report" in the 40 ----------8 O 9 -----
bottom-left quadrant. At the top of the page that 38 X 1 7
comes up, you can click on either "RS Pos" or "RS 36 O X
Col X" to access the list, or you can specifically pull34 3 X
the chart up by using RSX or RSP then the first four 32 O 6
letters. 30 ------------O 2 -----
28 6 1
26 O X
Now this all may sound a bit confusing, but stand
24 O C
back and take some time to look through these 22 O X
charts using the database site. You will be amazed 20 ------------7 X -----
the story they tell you. In time you will become adept 18 9 |
at evaluating them, and this will aid you in 16 | |
determining sector relative strength. Remember, all
you can do is stack as many odds in your favor as
possible, use the tools correctly, then make a
decision. It doesn't guarantee you will get the
outcome you always want or expect, but over time
you will be a winner. The bottom line, do not ignore
sector relative strength - it is one of the most
important tools at your disposal.

102
Different Sector Relative Strength Tools:
1. Sector (Index) Relative Strength Chart
2. DWA Sector Index (Equal Weighted) RS Charts

1) Sector Index Relative Strength 2) DWA Sector Index (Equal


Readings Weighted) RS Charts.

Symbol Index Symbol Sector Index

103
AUX Cboe Automotive Index DWAAERO DWA Aerospace Index
BIX S & P Banking Index DWAAUTO DWA Auto Index
BKX PHLX Bank Sector DWABANK Dorsey Wright Bank Index
BMX PHLX Computer Box Maker DWABIOM Dorsey Wright Biomedics
BTK Amex Biotechnology DWABUIL Dorsey Wright Building
CEX S & P Chemical Index DWABUSI Dorsey Wright Business
CWX Cboe Computer SFTWR DWACHEM Dorsey Wright Chemical
DOT PHLX the Street.Com Net In DWACOMP Dorsey Wright Computer
DRG Amex Drug Index DWADRUG Dorsey Wright Drug Index
DUX Dow Jones Utility Average DWAELEC Dorsey Wright Electronics
FPP PHLX Forest & Paper Produc DWAEUTI Dorsey Wright Electric Util
GAX Cboe Gaming Index DWAFINA Dorsey Wright Financial
GOX Goldlinx Intl Inc DWAFOOD Dorsey Wright Food Index
HCX S & P Healthcare DWAFORE Dorsey Wright Forest Prod
HMO Amex M.S. Healthcare Servi DWAGAME Dorsey Wright Gaming Index
HUI Amex Gold Bugs Index DWAGUTI Dorsey Wright Gas Utility
HWI Computer Hardware Index DWAHEAL Dorsey Wright Healthcare
IIX Inter@ctive Week Index DWAHOUS Dorsey Wright Household Goods
INX Cboe Internet Index DWAINET Dorsey Wright Internet
IUX S & P Insurance DWAINSU Dorsey Wright Insurance
MSH Morgan Stanley High Tech 3 DWALATI Dorsey Wright Latin America
NWX NWX - Amex Networking Indx DWALEIS Dorsey Wright Leisure
OIX Cboe Oil Index DWAMACH Dorsey Wright Machine
OSX PHLX Oil Service Sector DWAMEDI Dorsey Wright Media Index
PSE Pse High Tech Index DWAMETA Dorsey Wright Non Ferr Metals
RLX S & P Retail Index DWAOIL Dorsey Wright Oil Index
RMS Amex M.S. Reit DWAOILS Dorsey Wright Oil Service
RXH Amex M.S. Healthcare Hosp DWAPREC Dorsey Wright Precious Metal
SOX PHLX Semiconductor DWAPROT Dorsey Wright Protect/Safety
TRAN Dow Jones Trans Avg DWAREAL Dorsey Wright Real Estate
TRX S & P Transportation Index DWAREST Dorsey Wright Restaurant
TXX Cboe Technology Index DWARETA Dorsey Wright Retail Index
UTIL Dow Jones Utility Avg DWASAVI Dorsey Wright Saving & Loan
UTY PHLX Utility Sector DWASEMI Dorsey Wright Semiconductor
XAL Amex Airlines Index DWASOFT Dorsey Wright Software Ind
XAU PHLX Gold & Silver Index DWASTEE Dorsey Wright Steel Index
XBD Amex Broker Dealer DWATELE Dorsey Wright Telephone
XCI Amex Computer Index DWATEXT Dorsey Wright Textile Index
XNG Amex Natural Gas DWATRAN Dorsey Wright Transport N/A
XOI Amex Oil Index DWAWALL Dorsey Wright Wall Street
XTC Amex Telecom DWAWAST Dorsey Wright Waste Index

104
Welcome:
Lesson 5: Wrap Up

Sector rotation is a very important aspect to investing because it unveils opportunity in the market which
is usually unrecognized until it is too late. Often the media "hypes" a particular sector when it is already
over bought and at its peak. PnF allows you to recognize opportunity when it is the hardest to spot.

Part 1: Sector Bullish Percents. Part 2: Sector Relative Strength


Perfect Market Timing vs Perfect Sector Timing Sector Relative Strength
DWA Individual Sectors. Intel Example
Sector Bell Curves Sector (Index) RS Chart
Examples DWA Sector Index RS Charts

We will now test you to find your comprehension of the subjects discussed in Lesson 5.

105
Testing for Lesson 5

1) Match the Risk levels with the description and chart.

Bull Confirmed Market Bear Confirmed Market


Bull Alert Market Bear Alert Market
Bull Correction Market Bear Correction Market

1: 2: 3: 4: 5: 6:

30 O 78 50 58 60 X 70
28 O 76 X 48 X 56 58 X O 68 X
26 O 74 X O 44 X X 54 X 56 X O X 66 X O
24 O X 72 X O 42 X O X 52 X X O 54 X O X O 64 X O
22 O X 70 X O 40 X O X 50 X O X O 52 X O X O 62 X O
20 O X 68 X O 39 X O 48 X O X O 50 X O O 60 X
18 O 66 X 38 X 46 X O O 48 X O 58 X X
16 64 X 37 X 44 X O 46 X 56 X O X
62 36 X 42 X O 44 54 X O X
60 35 40 X O 42 52 X O X
34 38 X O X 50 X O
36 X O X
34 X O X
32 X O
30 X

2) Here is a chart of the Aerospace Airlines sector. At this point what would you do with the
stocks in your portfolio that belong to this sector?

80 X ----------+-------------+----------
78 X O | |
76 X O | |
74 3 4 | X | X
72 X 5 | 9 O | 4 O
70 X O X ------+-------X O --+-----X O
68 X O X O | X A | X O
66 X O X O | 7 O | X
64 X O X 6 | X O | 3
62 X O O | X O X | X
60 2 ----7 ----+-------X O X O ----X
58 X O X X O X O X
56 X O X B O X 6 O X O X
54 O 9 O X O 3 O X O C O X X
52 O X O X 1 X O 5 B X O 1 O X
50 ------O X A +-O X 4 X O X O X O 2
48 O X | O O X O O X O X
46 O X | O O O X
44 O X | | O
42 O 8 | |
40 ------O X --+-------------+-------
38 O X | |
36 O | |
34 | |
32 | |

106
Buy as many good fundamental stocks as you can.

Boycott the airline industry and vow to take trains and boats for the rest of your life.

Evaluate your stocks for weak issues that may be in trouble and either sell or hedge them.

Wait for a reversal up to buy more stock.

3) Same sector. What would you do with stocks in this sector here?

80 --------------+-------------+------------
78 | |
76 | |
74 X | |
72 4 O | |
70 ----X O ------+-------------+------------
68 X O | |
66 X O | |
64 3 5 | X |
62 X O | X X O |
60 ----X O ------+-X O 5 O ----+------------
58 X O C | X O X O |
56 X O X O X 2 X O | X
54 X X 6 X O X O X O X | X O
52 1 O X O X O X O X 6 X O | X O
50 X O 2 O ----X O X O X O X O +---X 4 -----
48 X O X O X O 1 O X O O | X O
46 O X O X O X 3 4 O X X O
44 O 7 B O X O X 8 1 O X O
42 O X O O X O X O X O
40 -------O ----X +---O ------O X O 3 O -----
38 O X | 9 C 2 X O
36 8 X | O X O X O
34 O X | O X O
32 O X | O B
30 -------O ----X +-----------O X -----------
28 O X | O X
26 O X | O |
24 O X X | |
22 O X O X | |
20 -------O X O X +-------------+------------
18 O X A X | |
16 9 X O | |

Liquidate all issues because a sell signal is coming up.

Wait for the sector to move below 30% to find the really good deals.

Still vowing never to fly again.

Consider buying strong stocks in this sector.

107
4) Answer the following questions with regard to this Bell Curve:

wast
TRAN
TEXT
reta
REAL
mach
wall leis
stee prot lati
semi meta fina
tele SAVI heal busi oils
inet prec EUTI BUIL rest hous GUTI
comp SOFT drug elec asia insu FOOD GAME
biom medi BANK auto aero fore euro CHEM oil
0-14% 16-20% 22-26% 28-32% 34-36% 38-42% 44-46% 48-52% 54-56% 58-62% ...

a. Looking at this Bell Curve, the market is:

Normal Oversold Over bought

b. Will this Bell Curve move more to the right or to the left from here?

Right Left Can't tell

c. The sectors in this Bell Curve are predominantly:

In X's In O's

d. Looking at the Drug sector (drug) on this Bell Curve, would you consider buying stocks in this sector?

Yes, drug stocks have been slammed by the media so it has to be time to buy.

No, it isn't below 20% yet.

Yes, the sector is in X's below 30% - you can buy stocks, whether weak or strong.

Not yet, the sector is still in O's and has not reversed up yet.

I'd have to see the actual chart to see where it normally resides.

Sector Relative Strength.

Complete the formula for the Sector RS reading by selecting the correct entry for each of the fields.

- Select One - - Select One - - Select One -


( / )( ) = Sector RS Reading

Score Test

108
Lesson 6 Introduction

Here we put it all together. Everything you have learned in the previous 5 chapters will come together
here. We will show you how to combine different aspects of the market to assess risk for trades or long
term investing. Rules of investing and trading examples. You will see how important it is to understand
each individual concept combined with the larger picture to make informed decisions towards your
investments.

Test yourself at the end of the chapter to sharpen your skills.

As with any chapter, if you have any questions, click on the questions button (?) and it will be answered
shortly (within 48 hours). You can also look at the link for questions above and see if the same question
has already been answered.

Message Board

109
Timing the Trade

Now we put the pieces of the puzzle together. Truly successful investors have some guidelines they
adhere to religiously. The following steps, combining what you have learned in the previous chapters, will
help you develop an effective game plan.

Part1: Initiating Positions - Four Step Check List


Part 2: Stock Selection Criteria/Techniques
Part 3: Summary

Part 1: Initiating New Positions - The Four Step Check List.

INITIATING NEW POSITIONS: A FOUR STEP CHECKLIST

As we have said many times in the past, we recommend a top-down approach to investing. In light of
that, we designed a four step process that you should go through when initiating new positions. Many of
you are probably well aware of this approach, yet we thought it would be a good review for you, given the
recent changes in the market indicators. Below we list the four step checklist -- each step is listed, then
we list ways that you can accomplish each step. In addition to that, we have supplied you with a checklist
of sorts to help you accomplish Step Four more easily. We recommend that you literally go through and
evaluate each stock you are considering buying. Once you have determined a fundamentally sound
inventory to work from, go through and write down the Pro's and Con's (technical picture) of each stock
you are considering for purchase. The checklist below can help you accomplish this. Basically, it is the old
saying "a picture paints a thousand words" - you will be able to clearly see before your eyes, in writing,
the positives and negatives of each stock. Hopefully this will help you make sound, clear-cut decisions,
without emotion.

STEP ONE:

What to Do: Use the NYSE Bullish Percent, Option Stock Bullish Percent, OTC Bullish Percent, High-Low
Index, 10 Week and other indicators to determine if you play offense or defense.

How to Do It: Every Thursday, we review all of our Technical Indicators in the Daily Equity Report. In
addition, we feature important changes in the Option Stock BP, High-Low Index and other daily-kept
indices intra-week in the Market Comment section when changes occur. You can also follow the market
indicators using our DWA Internet Database/Charting site.

STEP TWO:

What to Do: Determine which sectors suggest offense (and what their respective field position is) - those
in a column of X's on their Sector Bullish Percent chart. It is best to stay with those sectors that are bullish
and below 50%. Determine how a sector is doing relative to the S&P 500. Ideally, you want to invest in
sectors which are outperforming the SPX (are in a column of X's on their RS chart).

How to Do It: Every Thursday, we update the Industry Group Bullish Percent readings; and present the
Sector Bell Curve. This allows you to see where each sector lies and what its status is. As well, in
Thursday's report we do a summary of all the changes in the Index Relative Strength readings. The
sector bullish percent charts and the Index RS charts are available for viewing via our internet site, too.

110
STEP THREE:

What to Do: Create and maintain an inventory of stocks to work from. Use any number of sources
available to determine those stocks deemed fundamentally sound. In this step you are determining
"What" (specific stock) to buy.

How to Do It: Use your firm's Recommended List, the S&P Outlook STARs, Value Line 1's & 2's, or some
other fundamental sorting method you deem reliable. Separate your fundamental list (inventory) by
sector. Then keep a Point & Figure chart on those stocks you deem the very best fundamentally (again
separating them by sector). Our database program allows you to set up portfolios, so you could easily
keep a "fundamental favorites" list using that function.

STEP FOUR:

What to Do: Review fundamentally sound stocks on a technical basis to cull out those controlled by
demand, those that demonstrate the best technical picture. This will narrow your (fundamental) inventory
down to those issues with the best probability of moving higher. In this step you are determining "When"
to buy a specific stock.

How to Do It: Keep your own charts (update them daily by hand). Read the Daily Equity Report each and
every day as we present a multitude of technically sound ideas each day. Use the DWA Internet
Database site - in particular, the "Search/Sort Query Function". When trying to narrow your list down
using Dorsey, Wright Research, you should ideally focus on those stocks which are in an overall uptrend
(trading above their bullish support line), have positive relative strength versus the market and their
specific sector, are on a point & figure buy signal on their trend chart, have positive momentum, and
present a good risk-reward ratio.

In summary, try to adhere to this four step checklist when initiating new positions. By paying attention to
the market and the sector risks (opportunities), and then coupling the fundamentals with the technicals,
your odds of success should increase. Not every trade will work out, but this gives you a definable "Game
Plan", something your competition doesn't have. Stick to the plan, make your decision, then manage the
outcome.

111
Part 2: Stock Selection Criteria/Techniques.
Fine Tuning Your Entry Point -- (A closer Look at Step 4)

We discussed the 4 step proccess and will now take a closer look at step 4. This is evaluating the
individual stock on a technical basis. The first two steps, evaluating the Markat and Sector were covered
in previous chapters. The third step, working within a group of fundamentally sound stocks, is left to you.
Before you can evaluate a stock you must first identify your investment goals. A trader will evaluate a
stock differently than an investor. The trader may only be looking for a couple points while the investor
has a longer time horizon in mind.

1: The PnF Chart. Patterns, Resistance, Support, Change in Trend, Big Bases.

When evaluating a chart watch for areas of support and resistance. If you are considering a long position
you want to make sure the stock has not risen to a resistance level. Look for pullbacks to support as
buying opportunities. Trend line violations are very significant and should not be ignored. A stock that
violates a trend line is standing up and shouting "Look at Me!" If you own a stock that has violated its
bullish support line you MUST evaluate it. You may choose to give it additional room or you may choose
to sell it, but whatever you do make sure your game plan is in place and updated. Finally, watch the chart
for patterns that have been successful in the past. We have discussed many in this university such as the
Bullish Catapult and the Bullish Triangle. By sticking with charts that have patterns showing demand in
control your chances of success are greater. With all of the fundamentally sound companies available for
you to invest in, why buy one that dosen't have a chart showing demand in control.

2: Relative Strength. The best combination for RS is positive (buy signal) and in a column of X's. Watch
for changes in signals, and for reversals. Keep track of those stocks that hold up well despite sector
weakness, market divergences. Check the relative strength chart to be sure the stock is currently
outperforming the broad market. At least insure the stock is rising in a column of X's on its relative
strength chart.

3. Sector Rotation. Constantly stay abreast of where the particular sectors reside with respect to their
field position. If a sector is below 30%, watch closely for a reversal up and be ready when it does. You
can consider toe-dipping when you start to see the sector up tick. Take note of any changes in status. Be
aware of nuances for particular sector bullish percents. Couple this with sector RS, placing emphasis on
positive RS sectors.

4: Momentum - Daily, Weekly, Monthly. Important to watch for changes from negative to positive,
especially if it has been negative for a long time. We use weekly momentum predominantly, but daily is
very helpful for short term trading; and monthly is helpful for longer term changes in direction.

- Momentum: Following weekly momentum is very helpful when timing trades. A positive weekly
momentum suggests higher prices and negative momentum suggests lower prices. Weekly momentum is
a shorter term timing tool as changes to positive or negative weekly momentum last 6 to 8 weeks on
average. We can calculate the number at which momentum will change to positive or negative. If the
price of the stock is below or above the cross point the momentum changes. A price (last) that is lower
than the cross number turns the momentum negative. A price that is higher than the cross number turns
the momentum positive.

5: Trading Bands - 10 day and 10 week. These calculations give you an idea of the overbought or
oversold nature of a stock. The weekly distribution uses 10 weeks of data. It is displayed on the charts
using TOP, MED, and BOT at the corresponding levels. Top equates to 100% overbought and BOT is
100% oversold. Med is the midrange where we say the stock is neutral (normal) on its distribution.

112
Wkly Distribution

+ + +
+ | +
+ | +
+ | +
+ | +
+ | +
+ | +
+ | +
+ | +
-------------------|-------------------
100% Oversold Normal 100% Overbought
6: Gaps Down. News items or earnings reports come out that cause a stock to drop sharply. Often times
it will get an initial bounce back up. Watch to see if stock has pulled back to an area of good support. This
situation often provides quick trade. You can use the 18 O's down link to find potential ideas.

7: Risk-Reward: Has the stock pulled back? Identify the stop point, what the Price Objective is, where
the resistance lies, and if the stock is close to support. You want to know what the risk is if the trade does
not work out. You must be able to handle the worst case scenario.

113
Part 2: Stock Selection Criteria/Techniques.
Fine Tuning Your Entry Point -- (A closer Look at Step 4 cont.)

8: Taking Profits. Have an idea of what you are looking for going into the position. This relates to Risk
Reward mentioned on the previous page. Have a sell discipline, be willing to take partial profits. Sell a
third once up 30%. Sell a second third once up 50%. Hold the last third until technical picture dictates.
This allows you to take money of the table but at the same times lets the position run.

9. Stop Points - When a trade doesn't work out. Know your stop point and respect it. Be willing to take
action, don't become paralyzed. You are willing to take small profits, also be willing to take small losses.

10. Review Positions. Constantly review the stocks you own. Raise the stop points. Evaluate the
reasons why you bought the stock, have those reasons changed?

11. Don't fall in love with a position, is there something better? An account has limited capital so ask
yourself if the position is the best one to be in here, i.e. did you buy the stock for a trade then it became a
long term investment? Are you tying up capital that can be put to better use? This goes hand in hand with
reviewing your positions regularly. Don't get sucked into "the fundamental trap" - has the technical picture
deteriorated.

114
Lesson 6 Wrap Up

This university has been a good starting point to learn about the Point and Figure Methodology.
However, be sure to get a copy of Tom's book on Point and Figure charting. It is the most
complete resource on the topic. Over these six lessons we have covered the PnF methodology in
detail, from the basics of how to chart to the details of how our market indicators are created and
followed. Lesson six provided details of how you can take what you have learned and create a
playbook for suscessful investing. It is important to note that this methodology is not a science
but an art. To be good at this methodology requires pratice, and a lot of it. Only by constantly
evaluating charts will you refine your skills and become a true craftsman. As we like to say, once
you find religion you have to attend church.
The link in the lower right will take you to a case study. In the study you will be given indicator
data as well as charts on stocks. You will be given $200,000 of pretend money to make
investment decisions. The charts and data are real although the names have been changed. at the
end we will tell you when and who you were investing in. Be sure to read the directions and have
fun!

115
Game Rules

Start with $200,000 to manage through five consecutive market scenarios.


Click on the View Indicators link at the top of the summary table to see the information
given on the indicators and to decide whether you want to initiate new positions, raise
cash, or remain on the sidelines.
You will have 17 stocks to trade. Click on the symbol to see the chart. In each section
they will be updated so you can see how your stocks are doing.
The computer will act as the accountant and you are the advisor. Simply fill in the fields
indicating the appropriate action.
NO shorting and NO margin.
You can enter Limit and Stop Orders. You will see in the next round if your Limit or
Stop Order has been hit. Make sure you allocate money for the limit transactions.
Limit and Stop orders will NOT carry forward and must be entered in each section if you
want to use them.
The price of the stock is the last price on the stock chart.
Each section must be completed consecutively. No going back.

Here are a couple of helpful hints.....

Consider printing the Indicator Page. With so many pages to look at it is helpful to have
this one nearby.
You have the ability to enter notes underneath the name of each stock. Use this field to
describe orders you have entered and why you entered them.
If you need to start over you can click on the reset everything link and it will
COMPLETELY wipe the slate clean and you can start over.

Click here to start Section I

116
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