Point & Figure (P&F) Charts

by JDH on January 28, 2009

I don’t normally post during the week (I do have a real job, you know). Today, though, I thought I would discuss something that I have never discussed before: Point & Figure Charts.

I show charts quite frequently in my weekly commentaries, but I always show either line charts or candlestick charts, because they are simple to understand. In a traditional chart there is a time scale across the bottom of the chart, and one data set is plotted for each day.

A Point & Figure or P&F Chart is different. There is no “time” element to a P&F Chart; only price movements are charted, so if the price remains unchanged, the chart remains unchanged. Columns of X’s are used when prices are increasing, and columns of O’s are used when prices are falling, so it’s easy to see the trend on a P&F Chart.

There are lots of resources on the internet explaining P&F Chart; Stockcharts.com P&F page is a good place to start.

This site is called “Buy High Sell Higher”, because I have always believed that rather than trying to pick a bottom, it is safer to buy a stock that is obviously going up. The beauty of a P&F chart is that it’s very easy to see the direction.

Allow me to give an example. Last week I showed this gold chart:

I said that it appeared we were approaching a resistance level around $900, and therefore I thought it wise to take some profits in my gold stocks off the table, which I did.

Here is the same chart, a chart of gold, but this time it’s a P&F chart (up to the close on January 27, 2009): You can go to stockcharts.com to see the updated chart, or to create your own for whatever ticker symbol you want to track.

You can see by the four red circles in the last column that the trend is down. As long as “O’s” are appearing in the final column, the trend is down. Of course the trend could change at any time, but if you are watching the trends, this is a good way to see where stocks are going.

Let’s look at another example: the chart of AEM.TO – Agnico-Eagle Mines Ltd., both as a traditional line chart, and as a Point and Figure Chart:

The line chart shows that the longer term down trend remains intact, and the shorter term uptrend is also in place. The P&F chart makes it clear that at the moment the stock is falling. In fact, the computer generated chart even says that there was a “double bottom breakdown on January 27, 2009”, so obviously, as of today, the trend is down. Will the stock fall to the “bearish price objective” noted on the chart of $48? I doubt it, but obviously if it does we know for sure that the stock is going down.

What does this mean to me? My plan is to use P&F charts as another tool in the arsenal. If a traditional line chart looks good, I will also look at a P&F chart. If they are both giving the same signals, the decision to buy or sell may become more obvious.

As for AEM.TO – Agnico-Eagle Mines Ltd., it dropped as low as $59.86 today, but rallied to close at $63.19, down only $1.04 on the day. I will start placing buy orders at $60, and continue to buy on further weakness. As the price falls, I will continue to buy more. As the price rises, I will sell some of my holdings (as I did at the end of last week for $68).

Am I over thinking this? Any thoughts? Feel free to post your comments on the Forum.

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