Construction of the Intraday Point and Figure Chart

CONSTRUCTION OF THE INTRA­DAY POINT AND FIGURE CHART

We've already stated that the intraday chart was the original type used by point and figure chartists. The technique was originally used to track stock market movement. The intent was to capture and record on paper each one point move of the stocks under consideration. It was felt that accumulation (buying) and distrib­ution (selling) could be better detected in this manner. Only whole numbers were employed. Each box was given a value of one point and each one point move in either direction was recorded. Fractions were largely ignored. When the technique was later adopted to commodity markets, the value of the box had to be adjusted to fit each different commodity market. Let's con­struct an intraday chart using some actual price data.

The following numbers describe 9 actual days of trading in a Swiss franc futures contract. The box size is 5 points. Therefore, every 5 point swing in either direction is plotted. We'll start with a 1 box reversal chart.

Figure 11.5a is what the previously listed numbers would look like on the chart. Let's begin on the left side of the chart. First the chart is scaled to reflect a 5 point increment for every box.

Column 1: Put a dot at 4875. Because the next number— 4880—is higher, fill in the next box up to 4880.

Column 2: The next number is 4860. Move 1 column to the right, go down 1 box, and fill in all the o's down to 4860.

Column 3: The next number is 4865. Move 1 column to the right, move up 1 box and put an x at 4865. Stop here. So far you have only 1 x marked in column 3 because prices have only moved up 1 box. On a 1 box reversal chart, there must always be at least 2 boxes filled in each column. Notice that the next number is 4850, calling for o's down to that num­ber. Do you go to the next column to record the col­umn of declining o's? The answer is no because that would leave only 1 mark, the x, in column 3. Therefore, in the column with the lone x (column 3) fill in o's down to 4850.

Figure 11.5a A 5x1 point and figure chart of a Deutsche mark contract is shown in the upper chart. The blackened boxes show the end of each day’s trading. Figure 11.5b shows the same price data with a 3 box reversal. Notice the compression. Figure 11.5c shows a 5 box reversal.

Column 4: The next number is 4860. Move to the next column, move 1 box up, and plot in the x's up to 4860.

Column 5: The next number is 4855. Because this is a move down, go to the next column, move down a box, and fill the o at 4860. Notice on the table that this is the last price of the day. Let's do one more.

Column 6: The first number on 5/2 is 4870. So far, you only have one o in column 5. You must have at least 2 marks in each column. Therefore, fill in x's (because prices are advancing) up to 4870. But notice that the last price on the previous day is blacked out. This is to help keep track of time. By blacking in the last price each day, it's much easier to keep track of the separate days' trading.

Feel free to continue through the remainder of the chart to sharpen your understanding of the plotting process. Notice that this chart has several columns where both x's and o's are present. This situation will only develop on the 1 point reversal chart and is caused by the necessity of having at least 2 boxes filled in each column. Some purists might argue with combining the x's and o's. Experience will show, however, that this method of plotting prices makes it much easier to follow the order of the transactions.

Figure 11.5b takes the same data from Figure 11.5a and trans­forms it into a 3 box reversal chart. Notice that the chart is con­densed and a lot of data is lost. Figure 11.5c shows a 5 box reversal. These are the 3 reversal criteria that have traditionally been used— the 1, 3, and 5 box reversal. The 1 box reversal is generally used for very short term activity and the 3 box for the study of the interme­diate trend. The 5 box reversal, because of its severe condensation, is generally used for the study of long term trends. The correct order to use is the one shown here, that is, begin with the 1 point reversal chart. The 3 and 5 box reversals can then be constructed right off the first chart. For obvious reasons, a 1 point reversal chart could not possibly be constructed from a 3 or 5 box reversal.

Figure 11.5b        Figure 11.5c

THE HORIZONTAL COUNT

One principal advantage of the intraday 1 box reversal chart is the ability to obtain price objectives through use of the horizontal count. If you think back to our coverage of bar charts and price patterns, the question of price objectives was discussed. However, virtually all methods of obtaining price objectives off bar charts were based on what we call vertical measurements. This meant mea­suring the height of a pattern (the volatility) and projecting that distance upward or downward. For example, the head and shoul­ders pattern measured the distance from the head to the neckline and swung that objective from the break of that neckline.

Point and Figure Charts Allow Horizontal Measurement

The principle of the horizontal count is based on the premise that there is a direct relationship between the width of a congestion area and the subsequent move once a breakout occurs. If the con­gestion area represents a basing pattern, some estimate can be made of the upside potential once the base is completed. Once the uptrend has begun, subsequent congestion areas can be used to obtain additional counts which can be utilized to confirm the original counts from the base. (See Figure 11.6.)

The intent is to measure the width of the pattern. Remember we're talking here of intraday 1 box reversal charts. The technique requires some modifications for other types of charts that we'll come back to later. Once a topping or basing area has been identified, simply count the number of columns in that top or base. If there are 20 columns, for example, the upside or downside target would be 20 boxes from the measuring point. The key is to determine which line to measure from. Sometimes this is easy and, at other times, more difficult.

Usually, the horizontal line to count across is near the mid­dle of the congestion area. A more precise rule is to use the line that has the least number of empty boxes in it. Or put the other way, the line with the most number of filled in x's and o's. Once you find the correct line to count across, it's important that you include every column in your count, even the ones that are

Figure 11.6 By counting the number of column across the horizontal congestion area, price objectives can be determined. The wider the congestion area, the greater the objective.

empty. Count the number of columns in the congestion area and then project that number up or down from the line that was used for the count.

PRICE PATTERNS

Pattern identification is also possible on point and figure charts. Figure 11.7 shows the most common types.

As you can see, they're not much different from ones already discussed on bar charting. Most of the patterns are varia­tions on the double and triple tops and bottoms, head and shoul­ders, V's and inverted V's, and saucers. The term "fulcrum" shows up quite a bit in the point and figure literature. Essentially, the ful­crum is a well defined congestion area, occurring after a significant advance or decline, that forms an accumulation base or a distrib­ution top. In a base, for example, the bottom of the area is sub­jected to repeated tests, interrupted by intermittent rally attempts. Very often, the fulcrum takes on the appearance of a double or triple bottom. The basing pattern is completed when a breakout (catapult) occurs over the top of the congestion area.

Figure 11.7 Reversal patterns. (Source: Alexander H. Wheelan, Study Helps in Point and Figure Technique [New York, NY: Morgan, Rogers and Roberts, Inc., 1954] p. 25.) Reprinted in 1990 by Traders Press, P.O. Box 6206, Greenville, SC 29606.]

Those reversal patterns with the most pronounced hori­zontal ranges obviously lend themselves quite well to the taking of count measurements. The V base, in contrast, because of the absence of a significant horizontal price area, would not be amenable to the taking of a horizontal count. The blackened boxes in the chart examples in Figure 11.7 represent suggested buying and selling points. Notice that those entry points generally coin­cide with the retesting of support areas in a base or resistance areas in a top, breakout points, and the breaking of trendlines.

Trend Analysis and Trendlines

The price patterns in Figure 11.7 show trendlines drawn as part of those patterns. Trendline analysis on intraday charts is the same as that applied to bar charts. Up trendlines are drawn under suc­cessive lows and down trendlines are drawn over successive peaks. This is not true of the simplified point and figure chart, which we're going to study next. It utilizes 45 degree lines and plots them differently.

3 BOX REVERSAL POINT AND FIGURE CHARTING

In 1947, a book on point and figure was written by A.W. Cohen entitled, Stock Market Timing. The following year, when the Chartcraft Weekly Service was started, the book's name was changed to The Chartcraft Method of Point & Figure Trading. Several revised editions have been published since then to include com­modities and options. In 1990, Michael Burke wrote The All New Guide to the Three-Point Reversal Method of Point & Figure Construction and Formations (Chartcraft, New Rochelle, NY).

The original 1 box reversal method of plotting markets required intraday prices. The 3 box reversal was a condensation of the 1 box and was meant for intermediate trend analysis. Cohen reasoned that because so few 3 box reversals occurred in stocks during the day that it was not necessary to use intraday prices to construct the 3 box reversal chart. Hence the decision to use only the high and low prices, which were readily available in most financial newspapers. This modified technique, which is the basis of the Chartcraft service, greatly simplified point and figure chart­ing and made it accessible to the average trader.