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.
Friday, May 27, 2011
Bearish catapult on DJIA?
A 'bearish catapult in P&F is basically a triple bottom sell signal followed by a small pull back and then a double bottom sell signal (a triple/double bottom combo!)
If you read the above chart left to right, it can be seen that the price falls, finds support then reverses in to an up column. It then reverses down and finds support at the same level. Then reverses back up and then back down, this time breaking through the previous support. As it breaks support on the third attempt its called a triple bottom sell signal.
In the bearish catapult pattern, this is then followed by a pull back producing a descending top and finally a double bottom sell signal.
And here, on this daily 50x3 H/L P&F on the Dow Jones, we have a bearish catapult pattern! The target given from the top is 11,950 and is active.
While the short term view on the Dow based on this chart is bearish, one must concede that the overall chart remains bullish because the main bullish support line has not been breached and there are also two shorter term minor bullish lines in place (which i've inserted).
I am of the view that daily P&F charts are good for showing potential 'bigger picture' trends and reversals but are no good for trading. From 12,850 the Dow had already fallen 350 points before the first confirmed sell signal was given and the catapult pattern was only confirmed at 12,350, 500 points below the top.
The pattern holds until its broken and they need monitoring as they do not always play out (last September was a case in point - see to the bottom left of the chart how the Dow was 'rolling over' very nicely until QE2's announcement gave rise move that (on this 50x3 chart) equated to a (17x50) 850 point move before the next reversal.
And I guess the most obvious failing is that in order for the blue bullish support line to be broken (and a bearish resistance line to be drawn), the Dow has to fall a further 650 points! But the support line does at least confirm the long term trend.