What are point and figure charts? They look different than any chart that you have every seen. They use x’s and o’s instead of lines or bars and there is no time scale. Point and Figure charts began as a way of recording stock prices or organizing data. The charts depicted a battle between supply and demand. The x’s being price movement to the upside and the o’s to the downside. When there are more buyers than sellers the price of a stock will rise and adversely when there are more sellers than buyers the price will fall. If buying and selling are equal then the price will remain the same. This is simply Econ 101.
Technical analysis helps a person determine when to buy a stock. When you buy a stock it is important to have a price objective in mind and this is where point and figure charting comes into play.
Supply and demand analysis is fairly easy to understand and should be a part of your everyday investing.
Wouldn’t be nice to have a simple tool that would increase your investment confidence. To be able to create a plan for your investments and to be able to set a price objective……sounds pretty good! When I was working in the securities industry I learned point and figure charting through the Stock Market Institute. I immediately put the tools that I learned to use and the benefits to my clients was immeasurable.
The stock market is not for everyone, you have enjoy taking risks. This method will help you reduce that risk and provide you with a game plan. There will be times when you will be wrong but in the stock market if you diversify and your right more than wrong you will prosper.
Point and Figure charts are based on price action, not time. If there are no significant price moves, nothing changes. You can access point and figure charts for free at StockCharts.com. You will find that they have set defaults for the value of each box depending on the value of the stock or index that you are looking at. Just type in the stock symbol and you can look up the point and figure chart for your stock.
The chart below is constructed by using a 10 point value for each box (X or O representation). Any price change below this value (10 points) is ignored so point and figure charts filter out smaller price changes. The charts change column when the price changes direction by the value of a certain number of Xs or Os, I use a 3 box reversal chart. You don’t mark any change in direction unless the price changes by three boxes either up or down. In the chart below the O’s were put in place once the index moved from 1680 to 1650, and continued down to 1640. Then the price movement went up to 1670 and then down to 1640.
Price targets are achieved by measuring horizontally. If you look at the chart above from September (9) through January (1) there was a period of congestion. There are 9 boxes horizontally on the 1410 line up to the 1450 before the price movement begins the markup stage. You multiply 9 by 3 (the 3 box reversal chart) and multiply by 10 (the value of each box); the result is 270 points. Add this to 1410 or 1450 and you get 1680 to 1720 as a price objective.
You now have a method for determining a price objective whether it is for an index like the S & P 500 or an individual stock. There are also stair-step counts on the way to that price target. At the 1500 level are 3 boxes time 3 times 10 equals 90 with a target of 1590 which is met before another period of congestion appears at the 1540 to 1590 level. Five boxes times 3 times 10 equals 150 which provides a target of 1690 to 1740.
You now have a new tool to use! Perhaps you can review what your financial adviser is saying?
Price Objectives and Investor Type
Let’s take a look at a case study of Boeing stock:
From August (8) through October (A) Boeing was in a period of congestion. From the 55 line we can count 8 boxes so we multiply by 3 (3 box reversal chart) and that’s it since each box is worth 1 point, you get a count of 24. Adding 24 to 55 gives you a price target of 79. So, do you take the profit as it approaches 79? This is not an exact science.
The first question would be was the trend broken, remember the trend is you friend.
The trend appears to have been broken around 74 so most traders would have gotten out of the stock, perhaps to re-enter the stock at 78 almost a year later. For the long term investor this becomes a difficult decision, if he holds does he get forced out when the stock moves below support at 70 and slides to 67?
Back to the figure chart of Boeing. From January of 2012 through February of 2013 Boeing stock goes through another period of congestion and the point and figure count is 17 (boxes) times 3 (3 point reversal box) or 51 points. The price target is now 68 + 51 or 119. The entry point is at the break out at 78. So, the trader if he is still watching Boeing could re-enter and the long term investor has more upside. You just want to make sure that you are tracking the trend line, if it breaks the target of 119 might never be reached.
Update on Boeing:
Boeing actually overshot my price target but settled in around 120. It stayed in a range for around 4 years before moving on to its current price of $213. You could have taken profits and re-entered in 2017 when it broke out of the trading range.
You need to use bar charts in conjunction with point and figure charts in order to make more precise decisions.