Happy Bastille Day, which is French, I believe, for Bastille Day!
Among the chief benefits of using Point & Figure charts are their simplicity. Please do not misunderstand. This is not to say that Point & Figure charting is "better" than other types of charting. On the contrary, I often view other types of charts in addition to Point & Figure charts, but I always rely on the Point & Figure charts to provide the basis for my judgments.
Unlike other forms of technical analysis that require lengthy study to employ effectively, P&F charting is by comparison simple enough to be accessible to even those who do not possess a serious grounding in technical analysis. (I know, is there such a thing?) However, while the principles upon which the P&F methodology is founded are quite elementary, this does not necessarily mean P&F is "easy" or that reading charts is a simple, easily approachable task. Very often, the ease with which one can discern buy and sell signals on a chart is confused with the more advanced and far more difficult task of "reading" a chart.
Every chart has a context, which is bit like saying every chart tells a story. Consider the following statement:
"Jim looks like Frankenstein."
Now, taken alone, this appears to be an insult. Poor Jim. He resembles the Frankenstein monster. However, keep in mind that we have no idea in what context the above statement was made. If Jim were attending a Halloween party, then far from being offensive, the above statement could be taken as a compliment.
So too, does chart reading require a context. In other words, what particular signal or pattern a stock is on is meaningless without viewing that pattern within the context of what the overall chart is depicting, how the sector the stock is grouped in is behaving, and the condition of the overall market.
Let's look at the Philadelphia Bank Sector (BKX) and find some context for this morning's breakout that Toddo mentioned in his first post.
This morning the BKX broke a triple top at 900.
Taking a top-down approach we can begin to put this breakout in some context. First, the NYSE Bullish Percent is well above 70% (77% currently), and although it remains on "offense" we are at a high-risk juncture in the market. Second, the Bank Sector Bullish Percent is currently at 82%, also on "offense" but clearly at a high-risk juncture as well. Interestingly, the Bank Sector Bullish Percent has yet to reach the April 2002 high of 88%. Put simply, this move higher has occurred with more narrow participation than the April 2002 move higher.
We can also add some context to the BKX chart by extending the time frame (box-size). Looking at the 10-point scale chart of the BKX we see that 900 was also a double top break.
Importantly, these two views, the 5-point and 10-point scales, also show us where this index runs into trouble; 875 is the first sell signal on the 5-point chart while 840 is the first sell signal on the 10-point chart.
Finally, let's put the BKX breakout in some context within the overall market structure. To do this I can take the BKX chart out to a 20-point scale. This can show us more about the primary trend of the BKX going back several years.
Some important things to note about this longer-term chart:
· 920 exceeds the price peak from 2002, which was 900.
· This breaks, if only temporarily, the pattern of lower lows and lower highs that had been intact since late 2001.
· The 920 area, however, is also likely to be important longer-term resistance as this was the recovery high from the January 2001 top at 960 (it will take a move to 940 to technically "break through" this resistance area on the long-term chart.
· The breakout this morning was important if the longer-term structure of the market is to change, but put into present context (high market indicator risk, high sector indicator risk, the fact that it has occurred after a multi-month, 260 point move for this index) it suggests the upside is extremely limited from here without a corrective move.
If charts are pictures, and every picture tells a story, and every story has a context, then we have just put the BKX picture into the context of a larger story. The ending, of course, has yet to be written, but within this genre of story my fear is that the ending is more often sad than happy.
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