Back to Basics: Part III
Did someone say double bottom?
Editor's Note: This is an update of a previous article. Illustrations are courtesy of Dorsey, Wright & Associates.
See? Admit it. You thought all those Xs and Os had to be some type of gibberish. Easier than you thought, right?
Let's recap. In Lesson I and Lesson II we learned how to construct a point and figure chart. In this lesson I want to focus on two things:
1. What constitutes a basic point and figure "buy" signal
2. What constitutes a basic point and figure "sell" signal
In the point and figure methodology a buy signal occurs when one column of Xs exceeds a previous column of Xs. A sell signal occurs when one column of Os exceeds a previous column of Os. Let's look at examples.
Battle Between Supply and Demand.
The PnF Chart depicts the battle between Supply and Demand. There are two basic signals that develop. They are the Double Top Buy signal and the Double Bottom Sell signal. These are the two most basic patterns and it is imperative that you understand them.
A buy signal shows demand is in control of the stock. It occurs when a column of Xs exceeds the previous column of Xs.
A sell signal shows supply is in control. In this case the stock exceeded the previous column of Os.
The Double Top Break
A double top break occurs when a chart, in Xs, runs into resistance. Supply gains control and the chart reverses into Os. Demand then regains control of the chart and it reverses back into Xs where it rallies to the previous resistance. Here the double top is formed. When the chart is able exceed this resistance level and rise another box it gives the double top break.
The Double Bottom Break
A double bottom break occurs when a chart, in Os, falls to support. Demand gains control and the chart reverses into Xs. Supply then regains control of the chart and it reverses back into Os where it falls to the previous support. Here the double bottom is formed. When the chart drops enough to move below this support level and fall another box it gives the double bottom break.
When the series continues with Part IV we'll look at some more complex chart patterns.
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