Darren Winters

What do P&F charts look like?

A point and figure chart is always plotted as a series of columns, ideally on squared or graph paper. Each column contains either letter Xs , representing rising prices, or letter Os representing falling ones (never both!) The vertical axis of the chart represents share price, the horizontal one, time – but not in a linear sense! A new column is only added to the chart when the share price substantially changes direction, so one column on the chart can represent a single day, several days, or even several weeks!

The Advantages of Point and Figure Charts

Point and figure charts have several advantages over simple line graphs showing the movement of prices. Primarily they remove the effect of noise, concentrating on the high and low prices of each share during each day. They can also compress several days into one, depending on whether share movement is fast or sluggish, thereby compressing the horizontal axis (time) unevenly. Surprisingly, there are situations where this can prove useful. However, their greatest advantage is that they make spotting support levels, resistance levels and upward and downward trends very easy to spot.

What are Point and Figure Charts?

Point and Figure charts are a way of plotting the movement of share prices in such a way as to remove the effect of the noisy variations and just leave the important information. They were developed in the years before computers made chart plotting and interpreting easier as a quick method of tracking the stock market. Although their popularity declined when computers became common, there has recently been a renewal of interest in them.

A bull market, also known as a bull run, is one in which shares are generally rising in price. The investors are generally optimistic and keen to buy, thereby driving prices up further. A good example is the U.S. stock market in the early nineties, when all the stock market indices such as the Dow Jones rose almost continually. A bear market, on the other hand, is one where share prices are falling due to investor pessimism. The most famous bear market was the Wall Street Crash that started in October 1929.

This is another one of those “Looks a bit like what it means” terms. In this case, the price in shares dips in a gradual U shape and then picks up, followed by a slight drop marking the handle of the cup, and then a further climb. The peak between the cup and the handle occurs when the stock approaches the peak price on the initial side of the cup. Investors aren’t keen to test the stock price beyond that value, so the price holds steady (we say it “trades sideways”) with a slight downward trend – the handle of the cup.

The bounces that happen when shares reach their support or resistance levels tend to be repeated, that is, when a share falls to a support level, it may well bounce repeatedly off that level, and similarly for rising to a resistance level. However, shares can break through their support or resistance levels, referred to as a price breakout. Once a share has broken out, its tendency is to keep on moving.

Share prices rise and fall depending on, amongst other things, investor confidence. When shares are falling, they may reach a level where investors start to buy, perhaps feeling that the shares are now a “bargain”. The price would then rally slightly. Effectively, the share price has “bounced” off a minimum value. The rally in the share price may be temporary – it may start to fall again, and even bounce when it reaches roughly the same price. We say that investors are providing support for the shares at that price. Support levels indicate the price at which most investors believe the price will rise.

Technical Analysts (sometimes called “Technicians”) try to spot trends in share prices as they are continually changing, and have developed a vocabulary of technical terms to describe that behaviour. A lot of them, such as moving average or linear regression, are simply standard statistical methods that have been pressed into service to remove the random variation from the share price. Detailed descriptions of these can be found in any statistics text book, and there are many online tutorials that will explain them. Others describe the overall shape of the share-price graph in easy-to-understand terms, such as “cup and handle”, “head and shoulders” etc.