Welcome to EV's point and figures. This blog is dedicated to the use of point and figure charts in technical analysis.

Although P&F first appeared in charts in the 1930's, it is an often overlooked techique for analysing stocks and charts. A poor relation compared to line and bar charts and their range of momentum indicators. Yet few charts provide a clearer picture of the daily battle between bulls and bears for market control.

Like most methods, it should not be used in isolation. It should form part of an analysts 'tool box' and be used with other techniques to help form an overall view.

The charts that appear on this blog and any accompanying comments are purely for information purposes only - my own personal take on where the prices may be heading. They do not constitute investment advice.

Wednesday, February 16, 2011

FTSE 100 H/L charts: all eyes on 6,100

There are (in general terms) two methods for plotting point and figure charts. Boxes can be filled by comparing the closing price with the previous days closing price (my preferred method) or by using the high/low price achieved during the day with the previous high or low. Regardless of method, in their purest form, P&F charts show very clearly the ongoing battle between bulls and bears.

With this latter (H/L) method, you ignore the level at the close and simply ask yourself, 'during the day, did the price achieve a higher/lower level and in doing so fill a box to the upside (or downside)?' If yes, you mark a new X or O, depending on the direction of the price.

These H/L charts can often throw up quite different pictures compared to those based on the closing price/level. Take the FTSE 100 for example:

This is a 'noisy 10x3' high low chart, ie each box represents just 10 points on the index and to reverse each column requires a (10x3) 30 point movement in the opposite direction. This chart is currently showing an intense battle going on between the bulls and the bears, with 6,090 marking the line in the sand. At this level, the bulls have been batted back on three occasions since the turn of the year. There is clear resistance at this level. As a general guide, the greater the resisistance, the more powerful the move to the upside once the resistance is broken (the same applies for breaks of support in down markets) so this 6,090 level is one the bulls will need to take out for the rally to continue.

The slightly less noisy 25x3 chart (25 points per box, 75 points required to reverse a column) is even more revealing. Here, the line in the sand is at 6,075 and it can be seen very clearly that the bulls are pushing on this resistance again, having been batted back on three previous occasions. All thrilling stuff it must be said!
It's an interesting juncture. While it could be argued that distribution is taking place here, I would suggest that any decisive move higher enabling the bulls to capture the 6,100 box would constitute a hard fought victory for the bulls, setting the scene for a move to higher levels. We will know soon enough!

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