PnF University

Welcome:
Lesson 1: Introduction

Here we go! In this section we will list any

This chapter is designed to familiarize you with Point and Figure Charts, we call upcoming live online classes
these "attributes" in this University. For those that are familiar with PnF and specifically covering this chapter.
have used it in their investment research, you will know most of these terms
and concepts. However, it is good for a review as terms used in this chapter
will be repeated throughout the University. This chapter does include vital
information for basic charting and it shouldn't be skipped over as it is a
foundation for the following chapters. Chapter 1 is the base and each chapter
following is a vital component in understanding the big picture, how to put it all
together. One cannot understand the whole without knowing the parts.

Lesson 1 Contents:
Part 1: Attributes of a Chart Part 2: Chart Basics

Attributes Three box reversal

Box Scales Box scale tables
Dates and date lines Flow chart of investing
Trading bands Examples of how to chart
Numbers adn letters for the months Support Lines
Part 3: Support Lines
Bullish Support Line
Bullish Resistance Line
Bearish Resistance Line
Bearish Support Line

Test yourself at the end of the chapter to sharpen your skills.

If you have any questions, please check the "Questions" section to see if it has already been answered. If it has not,
then click on the question mark icon below to email us your question. It will be answered shortly (within two business
days).

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Welcome:
Lesson 1: Part 1. Attributes of a Chart

Here is a Point and Figure Trend Chart with the characteristics pointed out and described. We will go into
detail as we continue through the first lesson.
A Point and Figure Trend Chart:
The trend chart depicts the price action of the stock. We call it the trend chart because of the support and
resistance lines that determine whether a chart is above or below trend. If someone say's "...the trend chart"
you know they mean this type of chart, this is different from an RS chart for example.

* X's mean the chart is rising

* O's mean the chart is declining.
Key Points:
* Never will you see X's in a column of O's or vice versa.
* Each column must have at least three X's or three O's.

You will notice some

columns have
numbers or letters in
place of an X or an O.
(In blue). These depict
months:
1 = January
2 = February
3 = March
This continues until
October in which...
A = October
B = November
C = December
This is because two
digit numbers wouldn't
fit in the box.

The vertical axis is the price scale. From this you can determine the value of each
Value / Price column
row.
These are hyphenated as "Bot" for the bottom of the trading band, "Med" for the
Trading Bands: medium of the trading band and "Top" for the top of the trading band. Applications of
the the Trading Bands will be discussed in later chapters.
The Bullish Support Lines and Bearish Resistance Lines help us determine the
Trend Lines:
trend of the stock.

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Welcome:
Lesson 1: Part 2. Chart Basics:

Details of the individual chart characteristics.

The scale for a point and figure chart is on the left hand side or the
Value/ vertical axis. By looking at the price increments of the scale we can
Price determine the box size at that level.
Column

Box sizes: Price of Stock Box Size

Changes 0.00 - 5.00 0.25
are
determined 5.00 - 20.00 0.50
by the
price range 21.00 - 100.00 1.00
of the
stock or + 102.00 2.00
index.
Here is a
guide to
those
changes.
Examples: 0.25 box 0.50 box 1.0 box 2.0 box Notice how the
What the 5.00 9.00 40.00 120.00 increments work, how
price 4.75 8.50 39.00 118.00
4.50 8.00 38.00 116.00 the value changes and
columns 4.25 7.50 37.00 114.00 is determined by the box
would look 4.00 7.00 36.00 112.00 size.
like in the 3.75 6.50 35.00 110.00
3.50 6.00 34.00 108.00
various
box sizes:

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Crossing 0.25 to 0.50 box 0.50 to 1.00 box 1.0 to 2.0 box
Box 6.00 22.00 104.00
5.50 21.00 102.00
Sizes: change here change here change here
5.00 20.00 100.00
There are
4.75 19.50 99.00
times 4.50 19.00 98.00
when a 4.25 18.50 97.00
stock will 4.00 18.00 96.00
cross
several
box sizes.
Here is an
example of
what that
price
column
would look
like:

Next

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Welcome:
Lesson 1: Part 2. Constructing A Chart:

Rules for Charting:

Learning how to update a Point & Figure chart is fairly simple but there are a
couple of ground rules you must first understand. First, the Point & Figure chart
uses the high price and the low price for each trading day. Second, the chart
continues in the current column if possible. Third, a minimum of three boxes are
required to change columns. Finally, a chart can only move in one direction a day.
These four rules of charting are most easily understood by looking at them in a
Flow Chart format. Flow Chart for PnF Charting:
Here is the Flow chart for PnF charting. If you meticulously follow this flow chart,
you can not go wrong. Following the flow chart we will discuss each question.

Next

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First Flow Chart Question: "Continue Current Colunmn with X or O?"

Whichever column the chart is in, you will remain in that column as long as the stock
continues moving in that direction. If the chart is currently in a column of X's your first
question is, "Did the stock rise one full box or more on the chart?". If it did move one full
box, then you record that move by adding another X to the column. You are now done
updating that chart for the day.
As mentioned above when charting, you are concerned with the price which causes the
chart to continue in the current column. In other words we are establishing an action
point. If the chart is in a column of X's, you are looking at the high price of the day,
rounding down to the next whole number. If the chart is in a column of O's, you are
looking at the low price of the day, rounding up to the next whole number.

29
For example, a stock has a high 28 X <-28 7/8 is not high enough
of 28 7/8. For charting we would 27 X to close the 29 box.
use this at 28 26 X
25 X
When looking at the low, you go 32 O
up to the next whole number. 31 O
Using the same example, a 30 O
stock has a low of 28 7/8. You 29 O <-28 7/8 is not low enough
would read this as a low of 29.
28 to close the 28 box.

For the smaller box sizes you still round to the "whole" numbers in the box.

11.00
For example, in the .50 box 10.50 X <-10.63 is not high enough
size if a stock trades to 10.63
you would mark up to the 10.00 X to mark up to the
10.50 box not the 11.00 box. 9.50 X 11.00 box
9.00 X
5.00
With the .25 box size if a 4.75
stock trades to 4.73 for
instance, you would mark the 4.50 X <-4.73 is not high enough
boxes to 4.50 not 4.75. 4.25 X to mark up to the
4.00 X 4.75 box.

Second Flow Chart Question: "Does Stock Reverse Columns on

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Chart?"
If the answer to the first flow chart question was "no", then we must determine whether
the chart reverses direction thus changing columns. We use a three box reversal
method to determine a reversal.

Three Box Reversal Method:

The price action of a stock is marked by two different columns, by X's for the price
moving up and O's for the price moving down. In other words, X's are for demand and
O's are for supply. To move from one column to the next, from X's to O's or vice versa,
Point and Figure charts require a three box reversal. The stock must be able to move
three boxes before it can change columns. If a stock is in X's at $25 then it must fall 3
boxes to reverse into a column of O's. This would be $3 since the scale of the chart at
$25 is $1 per box and it must reverse by three.
Reversal Requirements: 0.00 to 5.00 0.75 pts.
Use this as a guide. 5.00 to 20.00 1.50 pts.
20.00 to 100.00 3.00 pts.
100.00 to 200.00 6.00 pts.

Examples:
Here are examples of the three box reversals for the different box sizes.

0.00 to 5.00 chart (0.25 box) 5.00 to 20.00 chart (0.50 box)
As shown in this example, the price As shown in this example, the price
had to move down or up a total of 0.75 needed to move 1.50 points down to
points to complete the three box make a full reversal.
reversal.

The reversal up, a move from 16 to

The reversal up, a move from 3.50 to 17.50, is a total of 1.50 points.
4.25, is a total of .75 points.
The reversal down, a move from 18 to
A move down from 4.50 to 3.75, is a 16.50, is a total of 1.50 points.
total of .75 points. As per the guide
above that is the amount needed for
the reversals.

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20.00 to 100.00 chart (1.0 box) 102.00 + chart (2.0 box)

As shown in this example, the stock As shown in this example, the stock
needed to move 3.00 down to make a needed to move 6.00 points down to
full reversal. See how on this chart a make a full reversal.
larger point move is needed than the
previous two.

The reversal up, a move from 106 to

112, is a total of 6 points.
The reversal up, a move from 24 to 27,
is a total of 3 points. The reversal down, a move from 114 to
108, is a total of 6 points.
The reversal down, a move from 28 to
25, is a total of 3 points.

If the stock does not meet the criteria to reverse (described above) then there is not
action on the chart for that day. Unlike a bar chart, a Point and Figure chart won't
necessarily make a movement everyday. If the price action of the trading day does not
continue the chart in its current direction (flow chart question 1) or change columns
(flow chart question 2), no mark is made on the chart.
For example, on the 1 box 33
chart:
Let's say a stock trades a high
32 X <-32.50 Isn't high enough
of 32.50 and a low of 29 7/8 and 31 X to add an X.
the column of X's are at the 32 30 X
level. 29 X <-29 7/8 isn't low enough
We'll go into more detail about this in a
little bit. to add O's

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PnF Chart Examples:

Here we demonstrate how a chart builds over a period of trading days.
Beginning Chart
High 47.63 Low 43.25
The top X is at the 46 level. The first thing to determine is whether the stock traded as high as 47 to add
another X. It has to be 47 even, not 46.999 but 47. Looking at the trade information (High 47.63, Low
43.25) it did trade as high as 47 so we can add another X to the column. That is all to be done for the
day.

Next Trading Day

High 47.975 Low 43
Each day is the same process. You look at the high and low to determine if you can continue in the
same column or if you have enough for a three box reversal. The high needed to add another X would
be 48, but the high was only 47.975, not enough. So now you look to see if it moved low enough for a
three box reversal at 44. The low was 43, so yes, it is enough for the three box reversal. In fact it adds
four boxes (O's).

Next Trading Day

High 50.125 Low 41.975
We are now in a column of O's so we look first to see if the stock trades low enough to add another O. If
it does an O is added no matter how high the stock trades. The stock managed to add another O to the
chart because it traded to 41.975 filling the 42 box. We do nothing with the move to 50.125.

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Next Trading Day

High 50.50 Low 41.45
Again the same procedure. We look to see if the stock traded to 41 to add another O and if not did it
trade high enough for a three box reversal up. Even though it traded into the 41 range it did not hit 41
even so therefore, no additional O. Now we check if it traded high enough for a three box reversal up
into X's at 45 and it did, it traded as high as the 50 box.

Next

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Welcome:
Lesson 1: Part 3: Support Lines

One of the most important guides you have in Point and Figure charting is the Bullish Support or Bearish Resistance Lines. It is uncanny
how a stock will follow along either the Bullish Support or Bearish Resistance Line. They are like brick walls.
A stock is bullish if trading above the bullish support line and bearish if trading below the bearish resistance line.

Bullish Support Line.

Serves as a guide for the up trend of a stock.

Has a habit of acting like a brick wall. Stocks will often
come right down to the bullish support line and then
bounce off.
To draw the support line, you must first have a buy signal
off the bottom. Go to the lowest column of O's and begin
drawing a line up at a 45 degree angle. The angle will
always be a 45 degree angle.

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Once a stock has formed a base of accumulation and gives

the first buy signal, we go to the lowest column of O's in the
chart pattern and begin drawing a trend line. Starting with
with the box directly under that column of O's and
diagonally connecting each box upward in a 45 degree
angle. This method, unlike bar charts, never connect prices
- the angle for the Bullish Support Line (also known as the
BSL) is always 45 degrees.

We will typically give a stock the benefit of the doubt if it

gives a sell signal while it is trading close to the Bullish
Support Line.

Once a stock is well above the long term bullish support line, short term trend lines can be drawn. When a stock rises significantly above
this trend line and gives more buy signals, you can go to the bottom O of that new distribution and draw another trend line. The first
Bullish Support line will always serve to be the long-term trend line and may very well come into play years later. These shorter term
trend lines serve as visual guides for you. The short-term trend lines can also be valuable to the trader in identifying the direction of
stocks. Traders often initiate a long trade when the stock has declined near the Bullish Support Line because the stock is then close to
the stop-loss point. The most important characteristic of the Point and Figure method is its clear guidelines for entering and exiting a
trade. Once of the main keys to successful investing is avoiding the big hit. These guidelines will help you do that.

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Example of a chart trading above its BSL, notice the gap in
space between the X's and O's and the BSL. We will draw a
secondary BSL from the area of accumulation around 18.
See how the secondary line would work for traders? It gives
a closer support line than the original BSL and with that a
closer stop on trades. Not all stocks trade high above the
original BSL and the original will be all that is needed but in
the case of high flying stocks, secondary lines can be very
helpful.

When the stock penetrates the trend line (the BSL) and
simultaneously gives a sell signal, it is critical event and a
strong sign to sell the stock. To qualify as a penetration, the
trend line must be violated and not just touched. There is no
such thing as the line being a little penetrated. It is or it isn't.
Below, the stock maintained the trend line all the way up
from $15 to $25. Soon after, supply took control of the stock.
When the stock hit $21, it not only gave a double bottom sell
signal but also violated the Bullish Support Line. The
violated support line was the key sign there was a high
probability that the trend had changed. *A trend change is
when the trend chart turns from negative to positive or vice
versa. This correlates to the Bullish Support or Bearish
Resistance Line. As long as the stock trades above the BSL
it is a positive trend but once it pierces that line the trend
becomes negative. We will go over buy and sell signals in
Lesson two.

Next

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Welcome:
Lesson 1: Part 3: Support Lines cont.

Bullish Resistance Line.

The Bullish Resistance line is drawn by moving to the left of the last
buy signal and going to the first wall of O's. Remember, it is not the
first column of O's but the first wall of O's. A wall of O's is usually that
last down move in the stock from which it begins to bottom out. This
is the point where demand begins to take the upper hand.
Go to the column of X's right next to the wall of O's and begin
drawing your trend line, beginning with the empty box above that top
X. This line will be a 45 degree angle as is the Bullish Support Line.
Typically, a stock will encounter resistance as it moves to the Bullish
resistance Line though this line may have to be drawn a number of
times. The boundaries of the Bullish Support Line and the Bullish
Resistance Line form a trading channel.

Here the Bullish Resistance Line is drawn after the Wall of O's,
above the column of X's beside it at the 21 dollar box.

Bearish Resistance Line.

Exact opposite of the bullish support line. It serves as a guide for the
downtrend of a stock.
Has a habit of acting like a brick wall. Stocks will often rally right up to
the bearish resistance line and then bounce off.
To draw the resistance line, you must first have a sell signal from the
top. Go to the highest column of X's and begin drawing a line down at
a 45 degree angle or a 135 degree angle.
Once a stock is well below the bearish resistance line, short term
resistance lines can be broken.
The bearish resistance line must be violated and not just touched in
order to turn the trend positive.

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We typically prefer not to go long when below the Bearish Resistance Line. This line, like the Bullish Support Line, can be as strong as a brick
wall. We say a stock is bearish when it is on a sell signal and below the Bearish Resistance Line. Be wary of buy signals that come from just
below this resistance line as they tend to be false or best suited to traders. Stocks that are moving up to this line typically find formidable
resistance there. Also, a stock must be on a buy signal to penetrate the Bearish Resistance Line. Short sales can be initiated in weak stocks
when the underlying stock rallies up to the resistance line but is still below it. This is the optimum point to sell short on any of the bearish chart
patterns.

The Bearish Support Line.

The Bearish Support Line is the reciprocal of the Bullish Resistance

Line and is drawn by moving to the left of the Bearish Resistance line
to the first all of X's. Again, not to the next column of X's but to the first
wall of X's. Then move the the first column of O's next to it and begin
drawing your support line down from the empty box below the last O.
The line, which will automatically be a 135 degree angle by connecting
the diagonal boxes, can be used as a guide to identify where any
decline might be contained.

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The Bearish Resistance Line and the Bearish Support Line, in

combination, form a channel that the stock can be expected to trade in.
Movement down to the Bearish Support Line is likely to cause bottom
fishing as investors create demand supporting the stock at that level.
As the stock rises to the resistance level, investors who have been
stuck holding the declining stock will elect to sell on rallies

.All the lines together.

With the DWA database only the primary support lines are shown; The Bullish Support and the Bearish Resistance Line.
Example of a long term Bullish Support Line.

61 | | 61
60 --------+---------------------------------------------------+---X ----------------------60 -
59 | | X O X 59
58 | X | X O X O 58
57 | X O X | X O X O 57

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56 | X X O X O X X O X O 56
55 --------+---------------------------------------X O X O X O X O X O --2 ------------ Med55 -
54 | X O X O X O X O X O 54
53 | X B X C O | 1 X O 53
52 | X O | O X * 52
51 | X X X | O X <--Bounced here 51
50 --------+-----------X O X O X ------7 --X ------X ----------+-O * ----------------------50 -
49 | X O X O X O X O X O X | * 49
48 | X O X 5 X O X O X O X * 48
47 | X O X O O X X O X O X X * | 47
46 | X O O X O X O X O X O X * | 46
45 -------+-----------X --------O X O X O X O A O X ----* ----+---------------------------45 -
44 | X 4 O X O 8 X O X O X <--Bounced here. 44
43 | X O X O X O X 9 X O * 43
42 | X O X O X O O * 42
41 | 3 O X 6 * 41
40 --------+-------X O ------------------------* --------------+---------------------------40 -
39 * X X * | 39
38 * X O X * Notice how the stock has 38
37 * X O X X * traded above the BSL and 37
36 Break ---->X O X O X * has bounced a couple of times 36
35 of BRL X --1 O X O X ----------------* ------------------------+---------------------------35 -
34 X O X O X 2 * | 34
33 X O X O * | 33
32 X C X * | 32
31 X X O | * | 31
30 - X O X --+---------------* ----------------------------------+---------------------------30 -
29 X O X | * | 29
28 X B | * | 28
27 O X | * | 27
26 O X | * | 26
25 O X ------+-----* --------------------------------------------+---------------------------25 -
24 A X | * | 24
23 O X | * | 23
22 O X * | 22
21 O X * | | 21
20 O X --* --+---------------------------------------------------+---------------------------20 -
19.5 O X * | | 19.5
19.0 O * <--Bullish Support Line is created. ----------------+---------------------------19.0

Example of a long term Bearish Resistance Line:

57 | | | | 57
56 * | | | 56
55 ---------------X * <--Bearish Resistance Line created. -----------------| ------------------------55 -
54 X X O * | | | 54
53 X O X O * | | | 53
52 B O X 1 * | | | 52
51 X C | O * | | | 51
50 -----------X --| O --------* ----------| --------------------| ----------------------------| ------------------------50 -
49 X X | O * | | | 49
48 X O X | O X * | | | 48
47 X O X | O X O * | | | 47
46 X A * 2 X O * | | | 46
45 ---X --9 ----* | O <--Break of BSL | --------------------| ----------------------------| ------------------------45 -
44 X O X * | O * | | 44

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43 * 8 O X * | 3 | * | | 43
42 O X O * <--Bullish | * | | 42
41 O X * Support | * | | 41
40 -O * -------Line O --------X ------| ------* ------------| ----------------------------| ------------------------40 -
39 * | O X X O | * | | 39
38 | O X O 6 O | * | | 38
37 | O X O X O | * | | 37
36 | O O X 7 | * | | 36
35 ---------------| --------O X --X O ----| ----------------* --| ----------------------------| ------------------------35 -
34 | O X O 5 8 | * | See how the stock continues to follow the
33 | 4 X O X 9 | * Bearish Resistance Line down and bounces
32 | O O X O | | * off the line a couple of times.
31 | O X O | | * | 31
30 ---------------| ------------O --O ----| --------------------| ----* ----------------------| ------------------------30 -
29 | O | 5 | * | 29
28 | O X 3 O X | * | 28
27 | O X O X O X O | * | 27
26 | A X C O X O X O | * | 26
25 ---------------| ----------------O X O X 1 --6 --8 ----------| ------------6 * ------------| ------------------------25 -
24 | O X O X O | 5 O <--Bounce off here. 24
23 | O B | O | X O * | 23
22 | | O | X 9 * | 22
21 | | O | 2 X O X * * | Top21
20 ---------------| ----------------------| --------O ----X ----| ----X O X --X O X O X --X * <--Bounce off here. -20 -
19.5 | | O X O | X O X O X O X O X O X O * 19.5
19.0 --------------| ----------------------| --------O ----X O --| ----X O X O X A X O X O X O | * ----------------------19.0
18.5 | | 9 X O | X O X O X O X O B X O | * 18.5
18.0 --------------| ----------------------| --------O ----X O X | ----X O 3 O X O ------O X O | ----* ------------------18.0
17.5 | | O X O X O X X O X 4 X O X O X * Med17.5
17.0 --------------| ----------------------| --------O X --B C X O X O X O X O ----------C --O X O X --2-----------------17.0
16.5 | | O X O X O O X O X O O X O X O X 16.5
16.0 --------------| ----------------------| --------O X O X ----O X O X --------------------O | 1 X O X ----------------16.0
15.5 | | O X O X 1 O | O O X 15.5
15.0 --------------| ----------------------| --------O X O ------| ----------------------------| ----O ------------------15.0
14.5 | | O X | | 14.5
14.0 --------------| ----------------------| --------O X --------| ----------------------------| -------------------- Bot14.0
13.5 | | O X | | 13.5
13.0 --------------| ----------------------| --------O A --------| ----------------------------| ------------------------13.0
12.5 | | O X | | 12.5
12.0 --------------| ----------------------| --------O X --------| ----------------------------| ------------------------12.0
11.5 | | O | | 11.5
11.0 ------------9 | 9 ------------------9 | 9 ------------------| ----------------------------| ------------------------11.0

Next

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PnF University

Welcome:
Lesson 1: Wrap Up

Lesson 1 is dedicated to familiarize you with Point and Figure charts, basic charting
concepts and the three box reversal method.

It is important that you understand fully the workings and rules of three box
reversals, the box sizes and the flow chart of investing. Without a sound knowledge
of this information it will be difficult to understand the following lessons and the
more in depth features of Point and Figure. The change of box size is always
something that takes a little getting used to and it is highly advisable that you
continue to do your own hand charting even after completing this University. The
better you familiarize yourself with three box reversals the more comfortable you
will be with your skills in PnF charting.
Another neat thing to do is pull up a chart on the DWA database, one that has
made a significant move during the trade day, and see what the chart looked like
before the major move. This way you can get a feel of the chart prior to large
swings either up or down - see what the chart was telling you ahead of time. I found
this to be extremely helpful and a fun exercise to work on daily. Getting the "feel" of
the charts will build your confidence as well. Use the DWA database to print charts
to keep by hand.
You will in time be able to look at a chart with high and low of the day and even
during the trade day, and determine the direction of the chart. This becomes almost
intuitive in time. If you still find the concept confusing review the lesson again and
of course read Tom Dorsey's book "Point and Figure Charting" in chapters 1 and 2.
His book has examples to learn from and also his personal experiences.
Part 1: Attributes of a Chart Part 2: Chart Basics

Attributes Three box reversal

Box Scales Box scale tables
Dates and date lines Flow chart of investing
Trading bands Examples of how to chart
Numbers and letters for the months

We will now test you to find your comprehension of the subjects discussed in
Lesson 1.

Next

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PnF University

Testing for Lesson 1: Attributes of a chart

1) Type the appropriate number or letter into the provided field for each
corresponding month:

October: September: August:

June: November: March: December:

2) Identify a specific attribute of these charts:

83
82 *
81 X * <--This item here is...?
80 X O * X
79 O X O * B The Bear Reversal Line
78 O X O * X I-95 North
77 O X O * X The Bearish Resistance
76 O X O X Line
75 O --O --------X A Constellation
74 O X X X The Bullish Support Line
73 O X O X O X
72 O X O X O X
71 O X O O X
70 ----O X ----O X

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88 X
87 X X
86 X O X
8 1 O X
84 O X O X
83 O X O X The Bearish
82 O X X O X * Resistance Line
81 O X O X O X * I-95 South
80 O X O X O X -- * -----Top The Bullish Support
79 O X O O X * Line
78 O X O * <--This item is...? Positive Trading Band
77 O X * A Bullish Terrier
76 O X *
75 O X * --------------Med
74 O X *
73 O *
72 *

3) Match the box size to the price range by typing the appropriate letter into
each field. You may use the same answer multiple times:
Box Size Price Range

a: 20.00 - 100
2.00
b: None/ NA
0.75
c: 5.00 - 20.00
0.25
d: 0.00 - 5.00
0.50
e: 102 +
1.00

4) Constructing Charts: Answer Yes or No to the following…

a. The Low price of the day and the yes no
close price of the day are used to
construct a chart.
b. The High and Low price of the day yes no
is used for constructing a PnF chart
c. It is possible for a chart to have no yes no
action during the trade day
d. X = Supply yes no
e. A chart can move in more than yes no
one column in a day.

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f. A chart must be updated and a yes no

new column added every day.
Flowchart of Investing:

If a chart is in a column of X's, you first look…

… to see if the chart reversed down yes no
into O's?
… at the High of the day to see if an yes no
X is to be added?
If the chart is in O's, you first look…
… to see if the stock declined one yes no
full box during the day?
… for the possibility of a reversal up yes no
into X's if the stock rose 20 points.

If a chart is in X's at $28 and the low for the day is $24, the high for the day is $29
and the stock closed at $24.5. The action on the chart would be...
Reversal to $24. Up one row to $29. No change on the
chart.
If a chart is in O's at $19 1-2 and the low for the day is $19 1-8, the high for the day
is $21 7-8 and the stock closed at $21. The action on the chart would be...
The chart will fall to 19. The chart will No change on the
reverse to the upside chart.

Score Test

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PnF University

Exercises for Lesson 1

Below are a three fun excercises in charting. First read the question then select the appropriate
action. There are points on the charts marked with a hyperlink giving you several possibilities. You
will be told if your answer is right or wrong and given another opportunity to try again if wrong.

Practice Chart 1 point box. 69 ---------------------------

Currently the chart is in a column 68
of Xs up to 64.
67 *
Here's today's data: 66 X * X <--?
High $66.00 65 ---X---X-O-*-----------X---
Low $60.00 64 X O X O * X X X
Last $65.75 63 X O X O X O X O X O X O
62 X O X O X O X O X O X O
You have the following options:
- There is no action on the chart 61 X O X O X O X O X O O
today 60 X-4-X-5---O-----X-9-------O <--?
- Two X's are added to 66 59 O X * 6 X X *
- A new column of O's down to 58 O * O X O 8 *
60 57 * O X O X *
56 * O 7 X *
55 *-------------O-*-----------
54 *

Practice Chart 2 point box. 140 -----X --X ----------

Currently the chart is in a column 138 X O X O
of Os down to 116.
136 X O X O
Here's today's data: 134 X O X O
High $128 132 X O X O
Low $114.125 130 -----X O --O -------
Last $116 128 X O X <--?
126 X O X
You have the following options:
- There is no action on the chart 124 X O X X
today 122 X O X O X
- One O is added to 114 120 -----X ----O X O X--
- A new column of X's up to 128 118 X O X O X
116 X X O X O
114 -X O X ----O X O <--?
112 X O X 8 X
110 -X O X ----O X -----

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108 X O O X
106 X O
104 X
Practice Chart .5 point box. 15.5
Currently the chart is in a column 15.0
of Xs up to 13.5.
14.5
Here's today's data: 14.0 X <--?
High $13.95 13.5 O * X
Low $12.125 13.0 O ----* ------------------X O
Last $12.5 12.5 O * X O
12.0 O X ------* --------------X O <--?
You have the following options:
- There is no action on the chart 11.5 O X O * X X
today 11.0 O X O X ------* --X O X --X --
- One X is added to 14 10.5 O X O X O * 7 O 8 O X
- A new column of O's down to 10.0 O X O X O X ------X O X O X --
12 9.5 O X O X O X O X X O X O X
9.0 O X O X 5 X O X O X O --O * --
8.5 O X 4 X O X O 6 O X * *
8.0 O --O X O * O X O X * --------
7.5 O * * O X O *
7.0 --* * ------O --* ------------

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PnF University

Testing for Lesson 1: Attributes of a chart

1) Type the appropriate number or letter into the provided field for each
corresponding month:

October: September: August:

June: November: March: December:

2) Identify a specific attribute of these charts:

83
82 *
81 X * <--This item here is...?
80 X O * X
79 O X O * B The Bear Reversal Line
78 O X O * X I-95 North
77 O X O * X The Bearish Resistance
76 O X O X Line
75 O --O --------X A Constellation
74 O X X X The Bullish Support Line
73 O X O X O X
72 O X O X O X
71 O X O O X
70 ----O X ----O X

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PnF University

88 X
87 X X
86 X O X
8 1 O X
84 O X O X
83 O X O X The Bearish
82 O X X O X * Resistance Line
81 O X O X O X * I-95 South
80 O X O X O X -- * -----Top The Bullish Support
79 O X O O X * Line
78 O X O * <--This item is...? Positive Trading Band
77 O X * A Bullish Terrier
76 O X *
75 O X * --------------Med
74 O X *
73 O *
72 *

3) Match the box size to the price range by typing the appropriate letter into
each field. You may use the same answer multiple times:
Box Size Price Range

a: 20.00 - 100
2.00
b: None/ NA
0.75
c: 5.00 - 20.00
0.25
d: 0.00 - 5.00
0.50
e: 102 +
1.00

4) Constructing Charts: Answer Yes or No to the following…

a. The Low price of the day and the yes no
close price of the day are used to
construct a chart.
b. The High and Low price of the day yes no
is used for constructing a PnF chart
c. It is possible for a chart to have no yes no
action during the trade day
d. X = Supply yes no
e. A chart can move in more than yes no
one column in a day.

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PnF University

f. A chart must be updated and a yes no

new column added every day.
Flowchart of Investing:

If a chart is in a column of X's, you first look…

… to see if the chart reversed down yes no
into O's?
… at the High of the day to see if an yes no
X is to be added?
If the chart is in O's, you first look…
… to see if the stock declined one yes no
full box during the day?
… for the possibility of a reversal up yes no
into X's if the stock rose 20 points.

If a chart is in X's at $28 and the low for the day is $24, the high for the day is $29
and the stock closed at $24.5. The action on the chart would be...
Reversal to $24. Up one row to $29. No change on the
chart.
If a chart is in O's at $19 1-2 and the low for the day is $19 1-8, the high for the day
is $21 7-8 and the stock closed at $21. The action on the chart would be...
The chart will fall to 19. The chart will No change on the
reverse to the upside chart.

Score Test

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History of Point and Figure Technical Analysis.

A brief history of Point and Figure Charting along with some statistics on sector timing versus
market timing.
(For history and more information about Dorsey Wright and Associates, click here.)

The premise of Point & Figure charting is to provide a logical, organized and sensible way of
recording the supply and demand relationship in any particular security or sector. When it is all
said and done, if there are more buyers in a particular security than there are sellers willing to
sell, the price will rise. On the other hand, if there are more sellers in a particular security than
there are buyers willing to buy, then the price will decline. If buying and selling are equal, the
price will remain the same. This is the irrefutable law of supply and demand. The same
reasons that cause price fluctuations in produce such as potatoes, corn and asparagus cause
price fluctuations in securities. - taken from the book "Point and Figure Charting" by Tom
Dorsey.

The chart above depicts the first style of Point & Figure charts. Over the years, they have
evolved. Today, the price is located on the vertical axis and the "figures" are replaced with X's
and O's. X's represent demand and are always moving up the chart while O's represent supply
and are always moving down the chart.

This methodology was prominent in the 1960's but then dropped out of favor. This form of
technical analysis is unique and to become a craftsman requires study. By attending this
on-line University you are well on your way to becoming a craftsman. You will learn more

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about this in Lesson 1.

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Point and Figure ABCDEFGHIJKLMNOPQRSTUVWXYZ

Glossary:

Please email if there are any terms that need to be added to the glossary.
10 Week Moving Stocks that trade above their own 10 week moving average.
Average Maintained for different universes such as NYSE and OTC as
well as different sectors.

As a chart trades sideways without a definitive move either up

Base or down we say it is creating a base. A base creates a distinct
area of support and resistance.
Bear Alert A bullish percent chart which falls from above to below 70%.
A bullish percent chart which shows a column of O's exceeding
Bear Confirmed
a previous column of O's.
A bullish percent chart which has reversed into X's from Bear
Bear Correction
Confirmed above 30%.
Bearish A combination pattern -- the triple bottom sell signal followed by
Catapult the double bottom sell signal.
Bearish
Resistance Line Used to identify a negative trend.
Bearish Signal Series of lower tops and bottoms at least seven columns which
Reversal is followed by a quick reversal up and double top break.
Series of lower tops and higher bottoms followed by a double
Bearish Triangle
bottom sell signal. 5 columns needed.
Bottom of the weekly distribution trading band. Shown on trend
BOT
charts.
BRL Bearish Resistance Line

BSL Bullish Support Line

A bullish percent chart reversing into X's from below the 30%
Bull Alert
level.
A bullish percent chart in a column of X's that has exceeded the
Bull Confirmed
previous column of X's.
A bullish percent chart in Bull Confirmed status that reverses
Bull Correction
into O's below 70%.
A combination pattern -- the triple top buy signal followed by
Bullish Catapult
the double top buy signal.

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Is the percentage of stocks, in a specific universe, that are on a

Bullish Percent
PnF buy signal.
Series of higher tops and bottoms at least seven columns
Bullish Signal
which is followed by a quick reversal down and double bottom
Reversal
break.
Drawn at a 45 degree angle from the bottom most O, after the
Bullish Support
chart has formed a bottom. This line identifies whether the
Line
trend is positive or negative.
Series of lower tops and higher bottoms that eventually breaks
Bullish Triangle
a double top. This pattern must be at least 5 columns wide.
Is given when a column of X's exceeds a previous column of
Buy signal
X's.
DJBB Dow Jones 20 Bond Average our primary bond indicator.

Double Bottom When a column of O's exceeds the previous column of O's.

Double Top When a column of X's exceeds a previous column of X's.

Dow Jones 20
Our primary bond indicator symbol= DJBB
Bond Average
High Low Index. This is one if our primary short term indicators
and can be kept on any universe of stocks. It is a 10 day
High Low Index
moving average of the following calculation --
[(New Highs)/(New Highs + New Lows)].
Horizontal Price A price count determined from the break of a large base formed
Objective in the chart.
Middle of the Weekly Distribution Trading band. Shown on
MED
trend charts.
A proprietary mathematical calculation based on the 1 week
Momentum moving average versus the 5 week, with importance placed on
changes from negative to positive.
Negative Trend When a stock is trading below its Bearish Resistance Line.

NYSE Bullish A primary PnF indicator. Percentage of stocks on the NYSE

Percent that are on PnF buy signals.

Optionable A percentage of stocks taken from the optionable stock

Bullish Percent universe that are on PnF buy signals.
OTC Bullish A percentage of stocks taken from the NASDAQ stock universe
Percent that are on PnF buy signals.
Positive Trend When a stock is trading above its Bullish Support Line
Where a chart reverses to O's after being in X's. Doesn't break
Pullback
support.
Relative Measures how well an index or security is performing relative to
Strength an index.
Resistance Line BRL, used to identify a negative trend.
Relative Strength.Measures how well an index or security is
RS
performing relative to an index.
Sell signal Where a column of O's exceeds a previous column of O's.

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A stock in an uptrend forms two tops and breaks a double

Shakeout bottom. The action point here is a three box reversal to the
upside.
Support Line Bullish Support Line
Top of the Weekly Distribution Trading Band. Shown on trend
TOP
charts.
The daily point and figure chart depicting price action of the
Trend Chart
stock or index.
Triple Bottom Occurs when a stock exceeds two previous columns of O's.

Triple Top Occurs when a stock exceeds two previous columns of X's.
Vertical Price Use to determine the upside potential of a stock; based on the
Objective strength of the original breakout.
Weekly
Based on 10 weeks of data, it provides a picture of the
Distribution
overbought/oversold nature of a stock.
Trading Bands

Point and Figure ABCDEFGHIJKLMNOPQRSTUVWXYZ

Glossary:

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PnF University

Welcome:
Lesson 2: Introduction

This chapter concentrates on the basic buy and sell signals In this section we will list any
for all PnF charts and pattern development. First we will show upcoming live online classes
how supply and demand control the movement of the chart specifically covering this
and how these signals are created. Then we will describe the chapter.
different patterns and how they develop. Every chart develops
a pattern which tells a story. It is through the understanding of Message Board
these patterns that we can analyze a chart. Here are the
basics.

Lesson 2 Contents:
Part 1: Chart Patterns Part 2: Price Objectives

Battle between supply and demand Vertical Price Objective

Double Top/Double Bottom Bullish Vertical Count
Triple Top/Triple Bottom Bearish Vertical Count
Catapult formations Horizontal Price Objective
Triangle formations Bullish Horizontal Count
Spread Triple Tops Bearish Horizontal Count
Shakeout formations Price Objectives with different box sizes.
Signal Reversed Patterns Calculations through changing box sizes.
Long Tail Down Examples
High Pole

Test yourself at the end of the chapter to sharpen your skills.

If you have any questions, please check the "Questions" section to see if it has already been
answered. If it has not, then click on the question mark icon below to email us your question.
It will be answered shortly (within two business days).

Next

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PnF University

Welcome:
Lesson 2: Part 1. Chart Patterns

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
imparative that you understand
them.
A buy signal shows A sell signal shows
demand is in control of supply is in control. In
the stock. It occurs this case the stock
when a column of X's exceeded the
exceeds the previous previous column of
colomn of X's. O's.
The Double Top Break Double Top Double Top Break
A double top break occurs when a
chart, in X's, runs into resistance.
Supply gains control and the chart
reverses into O's. Demand then
regains control of the chart and it
reverses back into X's where it
rallies to the previous resistance.
Here the double top is formed.
When the chart is able exceed the
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 O's, falls to
support. Demand gains control
and the chart reverses into X's.
Supply then regains control of the
chart and it reverses back into O's
where it falls to the previous
support. Here the double bottom is

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formed. When the chart is able

exceed the this support level and
fall another box it gives the double
bottom break.
Double Bottom Double Bottom Break

The Supply and Demand Scenario.

Double Top:
1) For 2) Over
example, IBM the next
rises to $60 few
and meets weeks
selling demand
pressure. This once
selling again
pressure creeps
exceeds the back into
demand at that the stock
price and the stock retreats. Remember, and
it requires a three-box reversal to causes the price to rise to $60 per
change columns. In this example, the share. This is causes a three-box
selling pressure was enough to force reversal back up into a column of X's,
IBM back to $57, the chart reverses to and IBM now sits at the same level that
O's from X's. previously caused supply to enter the
market.

3) The If it is again repelled, then the sellers are

question still there. If it instead is able to move to
now is $61, then we can say that demand has
whether prevailed at this price by exceeding the
the level where supply had previously
sellers gained control. By exceeding this level
that of resistance the Point and Figure chart
forced the gives its most basic buy signal, the
stock Double Top Break.
back Demand is now in control of this stock.
before
are still there. The only way to find out if
the sellers are still operating at that price
is to see how IBM negotiates that level.
Double Bottom:

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1) In 2) Demand comes into the

this stock with the price rising to
57 and reverses the chart
into a column of X's.

pattern, supply wins the

match. Instead of IBM
exceeding the previous point
of resistance, it instead
reversed and exceeded the
previous level of support. Here
the stock first reverses down
into O's to the 54 level.
3) Summary:
Supply wins and the probability of lower prices
come into play. The reason supply overtook
demand is not important. What is important is
knowing that supply is in control, for in the end,
supply and demand cause stocks to move up and
down and nothing else.

The stock encounters selling

pressure which drives IBM
back down the chart to the 54
level where demand previously
took control providing support.
However this time, the buyers
are not there as before and the
selling pressure persists until
the stock exceeds that level of
support.
Supply again takes over and
the chart reverses back down
to 53 exceeding the support at
54 and creating a double
bottom sell signal at 53.

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More Examples:
Here the stock rises to $60 a
second time where it is
repelled. This shows there is
resistance at that level. The
column of O's exceeding the
previous column of O's gives
the double botom sell signal,
one of the most basic patterns.
At this point we do not have
enough pieces of the puzzle to
say whether to sell the stock.
As we conintue through the
university all the different
pieces will start to come
together.
This stock found good support
at 54. This is clearly shown on
the chart as the price where
columns of O's stopped. This
is one of the great advantages
of Point and Figure charts.
They are as clear as it gets.
There is no mistaking whether
a stock gave a buy or sell
signal. In this example, after
holding the support, demand
regains control and exceeds
the previous top at $57 giving
the double top buy signal.

The Bullish Signal

We add one more dimension, an
added clue, to the pattern this
time. In this next pattern, the last
column of O's does not extend
down as low as the previous
column of O's. We call that a rising
bottom. It signifies that supply is
becoming less a factor in driving
the stock. On the other side of the
coin, demand is getting stronger as
the last column of X's exceeds the
previous column of X's giving a
double top buy signal. The rising
bottom shows us that supply is
getting weaker providing added
guidance when evaluating the
supply-demand relationship of the
underlying stock.
The Bearish Signal

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Demand in this case is becoming

weaker as the last column of X's
fails to reach the previous level.
Selling pressure however is
increasing as evidenced by the
lower column of O's. These clues
simply suggest demand is losing
strength and supply is gaining
strength.

The Bullish and Bearish Signals here are part of Double Top/Double Bottom
patterns but when analyzing charts with all patterns types recognizing a series of
higher bottoms and tops or lower tops and bottoms is crucial in making the right
trade or investment decision.

So far we have discussed the Double Bottom and Double Top. All other other
patterns we will cover are expansions of this basic form. By now, you can see how
simple this method is to grasp.

Next

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Triple Top Buy Signal

The Triple Top is exactly what The buy signal is given when the stock
the name suggests - a chart exceeds the level that previously caused
pattern that rises to a certain the stock to reverse down.
price level three times. The
first two times the stock visits
that level, it is repelled by
sellers. The third time the
stock rises to that level, it
forms the Triple Top.

There are many reasons why a stock will encounter supply at certain levels. Think back
to a time when you bought stock thinking it was at a bottom or at least an opportune
price level to buy. Instead of rising, the stock immediately declined. We have all had
experiences like that. The thought that probably crossed your mind as you saw the
stock lose value was that if the stock got back to even you were out! This is a perfectly
normal human reaction. When you place that order to get out at your break-even point,
you are in essence creating supply at that level. If more sellers are willing to sell their
stock at that level than buyers are willing to buy, the stock will decline. The only way we
know whether the selling pressure has been exhausted at a particular level is if the
stock is able to exceed that price. If the stock is repelled again, the sellers are still
there. The more times a stock pulls back from a resistance level, the stronger the
breakout will be when it comes. It was said years ago that the degree to which a stock
will rise is in exact proportion to the time the stock took in preparation for that move. In
other words, the wider the base from which a stock breaks out the higher the stock will
rise. This is why we consider the triple top break a stronger pattern than the double top.
Triple Bottom Sell Signal.
The Triple Bottom sell signal, like the Triple Top, has a high degree of reliability. It is
characterized by a stock falling to an area of support three times. The first two times
the stock holds and reverses up. The third time there is not enough demand to cause
the chart to reverse and instead it exceeds the two previous bottoms giving the triple
bottom sell signal.

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Consider What is he missing in this puzzle? What

for he is missing is that a battle between
a supply and demand has been completed
with supply winning the match.

moment an investor who buys a

stock at $31 per share and then
leaves on vacation for one month.
He checks the price frequently and
notices that his stock is still around
the price he paid for it, only down a
point. Not bad for a market that had
been volatile for the past month.
He feels comfortable with the stock
as the fundamentals remain in
place.

The probability of lower prices is very high. The Triple Bottom sell signal does not
mean that the stock will cave in immediately, it suggests that the risk in that position
has increased tremendously. Whether this investor chooses to do anything about the
signal or not, he should at least be aware of it. If the investor does nothing other than
increase his awareness of a potential decline, he is far ahead of the investor who
holds the same position without any warning. It is imparative to update the charts. By
doing so patterns such as this one will not sneak up on you.

The Bullish and Bearish Catapult Formation

The Bullish Catapult is a combination of the Triple Top buy signal and the Double Top
buy signal. This pattern is a confidence builder. The Catapult is created when a stock
gives a Triple Top buy signal whic is followed by a pullback producing a higher bottom.
Following the pullback, demand regains control and the stock reverses back up and
gives a Double Top buy signal. The charts below depict a Bullish Catapult formation.

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Bullish Catapult Completed:

First the Triple A triple top
Top... Then the Double Then the Double Top followed
Top... Break by a double top
break.

Notice the Triple Top buy signal followed by the pullback into a column of O's. Notice
how the column produces a higher bottom. The resumption of trend completes the
Catapult by giving a Double Top buy signal. To better understand what the Catapult is
saying, let's look at each piece of the pattern as illustrated above.
1.)The Triple Top is 2.)The subsequent
saying that the stock has reversal producing a
a very high probability of higher bottom
rising in price, assuming suggests that supply
the market is in a bullish is beginning to dry up
mode. or become a less
In fact, this type of pattern significant factor.
has a success probability
of 87.5% in bull markets.
3.)The This is a pattern that you can be
resumption of aggressive with especially when the
trend and overall markets are in a bullish mode, the
subsequent underlying sector is in a bullish mode, and
Double Top buy the fundamentals are superior in the stock
signal simply (we will cover all of these other aspects in
confirms the later lessons.).
Triple Top. This
is why it is called
a confidence
builder.

Next

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Welcome:
Lesson 2: Part 1 continued... Chart Patterns

Bearish Catapult
This can be interpreted exactly opposite the Bullish Catapult formation and is particularly
useful in timing short sales as it clearly shows supply in control. Watch carefully for this
pattern because it suggests lower prices from the underlying stock. Below is an example of
how it is formed.

First the Then the Then the Double Completed:

Triple Bottom ... Double Bottom... Bottom Break... A triple bottom followed
by a double bottom break

Let's break this down some more.

Interpreting what this In the same respects of a Bullish Catapult being
formation is telling us a confidence builder the
we first see the Triple Bearish Catapult is a
Bottom break, which confirmation of a stock
you have already breaking down. The Triple
learned is very Bottom sell signal is then
negative for the stock. followed by a lower top and a
Double Bottom sell signal,
two sell signals in a row
along with a lower top.

These two signals together clearly show supply coming into control of the stock and demand
drying up.

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Looking at the two stocks to the right. If they Bullish Catapult Bearish Catapult
are both recommended on a fundamental
basis, in the in the same sector and at the
same price, Which one would you buy?
Clearly, you would pick the one on the left.
The beauty of Point and Figure is that it is
very visual, very easy to see which stocks
are rising and which are breaking down.

The Triangle Formation

The Triangle formation is easily identified by the higher
bottoms and lower tops. This sounds a little backwards
but what is happening is that the chart is a bit confused.
There is no clear winner in the battle between Supply
and Demand. As the lower tops and higher bottoms
develop the chart comes to a point creating the triangle
look of the pattern. When the chart comes to a point
either supply or demand will have to gain control and
either a double top break or a double bottom break will
be given. A break to the upside designates a Bullish
Triangle and a break to the downside designates a
Bearish Triangle. To qualify as a Triangle, the pattern
must have at least five vertical columns. Examples of
the Bullish and Bearish Triangle are below. 5 columns needed to complete a
triangle.
Bullish Triangle

If the pattern resolves itself up, it will give a double top

buy signal. The Double Top buy signal simply suggests
that demand has won the match and the probability is
higher prices in the stock.

Bearish Triangle

If the pattern breaks down the match is won by supply.

The Double Bottom sell signal suggests that the
probability is lower prices in the stock.

Spread Triple Top Pattern and Spread Triple Bottom Pattern.

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This pattern is basically the same as the triple top and triple bottom with one exception. The
testing of the support or resistance level is not completed in three consecutive columns. For
example, a stock may rally and test 55 twice, then on the third trip back up it only reaches 53
before it pulls back again. Then on the fourth atempt it is able to break the 55 level. The
stock still exceeds the 55 level it tested three times but there was a "spread" between the
second and third atempt. This is one that is best understood by looking at an example.

Spread Triple Top Spread Triple Top Spread Triple Bottom. Spread Triple Bottom
A gap in between break. A gap in between three break
three columns of X's A column of X's column of O's at the A column of O's
at the same level. exceeds the spread same level. exceeds the spread
triple top. triple bottom.

The same philosophy applies with these patterns as the Triple Top and Bottom. We will take
a look from the Triple Top perspective. In each case, the stock rises to a certain price level
and is repelled two times. The third attempt at that price is successful by the stock moving
through the level shown by a column of X's exceeding the point of resistance. Since the
stock was repelled twice at that same level, there are apparently sell orders there. The
reason is not important. What is important is that you know there are sellers at that particular
level. The only way to know if demand can overtake the selling pressure is to see how the
stock negotiates the level again. Simply stated, if the stock is repelled again at this level of
resistance, the sellers are still there. You need not know any more. If the stocks exceeds that
level, then demand has overcome the supply that previously caused it to reverse.

Notice that in the following two patterns, the stocks are trading at the same price. Consider
that both stocks are fundamentally sound and each is being recommended by a major firm
on Wall Street. Both stocks are in the same industry group and pay about the same dividend.
You have studied the fundamentals of the two stocks and are now trying to determine which
stock to buy. It's the moment of truth. Which stock do you select?

Stock A: Spread Triple Top Stock B: Spread Triple Bottom

Without the chart patterns shown here, you would be in a quandary. Looking at the
fundamental data alone, both stocks are equal, therefore both stocks should do about as well

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in the future. Not so. If you had the benefit of evaluating the Point and Figure charts the
selection process would become much easier. With the information and charts above which
stock do you select? It doesn't take an in-depth understanding of this method to determine
Stock A is on a buy signal with the probability of higher prices and Stock B is on a sell signal
with lower prices likely.

This simple exercise shows why charts are so important and why you can achieve the best
results in the market when you use both fundamental and technical analysis.

Next

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Welcome:
Lesson 2: Part 1 continued... Chart Patterns

The Shakeout Formation.

This pattern has a high degree of reliability. The Shakeout is relatively new and we
have found it very useful in real-life application. It is called the Shakeout because
the pattern is deceiving causing some holder of the stock to sell, in effect "shaking
out" these weak holders.

For the pattern to be a true Shakeout formation, it must have the following
attributes.

1. The stock must be in a strong up trend and trading above the Bullish Support
Line.
2. The stock must rise to a level where it forms two tops at the same price forming
a Double Top.
3. The subsequent reversal of the stock from these two tops must give a Double
Bottom sell signal.

Shakeout Pattern
Then the chart gives a Double Bottom sell signal.
First, this pattern is in a strong
up trend.

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Bearish Signal Reversed.

This pattern must have seven

columns to qualify. Each
column of X's must be lower
than the one before and each
column of O's must carry lower
than the one prior to it. Action
of this type indicates supply is
in control and getting stronger.
In this pattern we will see the
stock reverse up and quickly,
without a period of
accumulation, break a double
top. This reverses the series of
lower tops and often leads to a
strong move to the upside. The
action point with this chart is
the breakout. We wait for the
breakout because until it is
given supply is in control. We
do not see this pattern very
often but when we do its one of
the best.
Bullish Signal Reversed.

This pattern is the reverse of

the Bearish Signal Reversed.
This pattern shows seven
columns of rising bottoms and
rising tops. When the last top is
made in the seventh column,
the stock reverses and without
a period of distribution declines
to give the Double Bottom sell
signal reversing a series of
rising bottoms.

Long Tail Down.

To qualify for a Long Tail

Down, we like to see a stock
that has declined 20 boxes or
more with a reversal up. We
are not going to split hairs over
20 boxes down. In fact, we
start looking when a stock falls
18 O's down. What we are
looking for here is a trade. The
next three box reversal to the
upside often leads to a decent
bounce. When evaluating
these plays we want to find
stocks that have pulled back to

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an area of support and we

want the reversal to occur fairly
quickly. If the stock falls 20
boxes and sits there for 3
months then we wouldn't look
for much of a "Dead Cat
Bounce".

High Pole Warning

Formation.

This pattern is not actually a

sell signal. It occurs when a
chart exceeds a previous
column of X's by at least 3
boxes. Following the rise in X's,
the stock must pull back at
least 50 percent of that last
up-thrust on the chart. The
thought behind the formation is
that there must be something
wrong with the supply-demand
relationship if the stock
subsequently gave up 50
percent of the last move up. It's
a warning that supply might be
taking control of the stock.
In the example to the right the
stock rises above the previous
column of X's by four boxes
making the move 7 boxes in
total. A greater than 50%
retracement would be a
pullback of 4 boxes or a move

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to 19.

Next

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Welcome:
Lesson 2: Part 2 - Price Objectives.

Vertical Price Objective and Horizontal Price Objective.

This technique is used when evaluating the risk/reward ratio of a stock. It is
imperative that you evaluate the risk/reward ratio when investing. This will be covered
in detail in later lessons. Price objectives are NOT set in stone, but are a good
guideline in determining how far a signal can carry a stock. There are two types of
counts; the Vertical Price Objective and Horizontal Price Objective. With each type
you can determine a bullish and bearish price objective. Each are described below.
The Vertical Price Objective.
You will hear people ask "What is the PO?" - meaning, "What is the Price Objective?".
Typically we use the Vertical count when evaluating price objectives. We prefer to use
the Horizontal count when a stock has built a large base. Here are how they are
calculated.
For the Bullish Vertical Count:
Look to the column that has the first buy signal off the bottom and count the number
of X's in it. You wait for the reversal down into a column of O's before counting the
number of X's up to ensure there will be no more X's added to the column.
Once you have counted the X's, multiply by 3 (for the three box reversal method) and
then multiply that product by the value per box.
Add this result to the bottom X

There are 10 X's in the first column of

X's from the LAST sell signal.
Multiply 10 times the three box
reversal method (3) 10 x 3 = 30
The box size is 1 (we will cover box
sizes in a minute) so the calculation
now is 30 x 1 which equals 30.
Add 30 to the bottom X of the column
you counted 30 + 21 = 51.
51 is your price objective.

Let's break it down piece by piece.

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1: 2:
Find the last sell signal on the chart Find the column of X's that create the buy
signal after the last sell signal.

3: 4:
Determine if the run in the column of X's Count the column of X's with the buy
has been terminated by a reversal. signal.

5: 6:
Determine the price level at the bottom Start your calculation.
of the column of X's.

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Formula: (# X's)(3)(box size) + bottom X

= PO

There were 10 X's in the column.

10 x 3 (for the three box reversal). = 30.
30 x 1 (box size) = 30.
30 + 21 (bottom X at the $21 level).= 51
51 is the Vertical Price objective.

Next

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Welcome:
Lesson 2: Part 2 - Price Objectives.

The Bearish Vertical count.

Look to the first sell signal off the top
and count the number of O's it
moves down before reversing back
up. You wait for the reversal up into
a column of X's before counting the
number of O's down to ensure there
will be no more O's added to the
column.
Once you have counted the O's,
multiply by 2 (this is where the
bearish count is different from the
bullish count) and then multiply that
product by the value per box. This is
because the market generally has a
bias towards the upside so we
multiply by a smaller number.
Subtract this result to the top O

Let's break it down.

1: 2:
Find the last buy signal on the chart Find the column of O's that create the
sell signal after the last buy signal.

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3: 4:
Determine if the run in the column of O's Count the column of O's with the sell
has been terminated by a reversal. signal.

5: 6:
Determine the price level at the top of the Start your calculation.
column of O's.
Formula: (# O's)(2)(box size)-Top O =
PO

There were 10 O's in the column.

10 x 2 = 20.
20 x 1 (box size) = 20.
31 - 20 (top O at the $31 level). = 11
11 is the Vertical Price objective.

Next

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Welcome:
Lesson 2: Part 2 - Price Objectives- Horizontal Count.

Horizontal Price Objective.

The Horizontal Price Objective is determined by measuring the base that a stock
has created and broken. Stocks that have formed a large base lend themselves to
the horizontal count. Otherwise we would use a vertical count. When a stock
creates a large base, we measure its width. The base of the formation must be
unbroken. In other words, you must be able to count horizontally the columns filled
with X's and O's without any spaces in between. Find the widest part of the base
that is unbroken to count. In general, a horizontal count is a judgment call. There
are no minimum columns required but you will see many charts where a large area
of accumulation was created and then the chart broke out. These are the charts
where a horizontal count is most effective - we think of them as powder kegs. The
more it builds up the more explosive the breakout can be.

Bullish horizontal
count.
Once a buy signal is
given, count across
the base the stock
has built.
Multiply the number
of columns across
the formation by 3
and then multiply
that product by the
value per box.
Add this number to
the bottom of the
formation.

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Let's break it down.

1: 2:
Make sure there is a buy signal off an Find the widest part of the base
accumulated base. unbroken, that can be counted.

3: 4:
Count the columns. Find the bottom of the base. Sometimes
this is a judgment call too.

5:
Calculate the PO.

Formula:
(# Col. across the base)(3)(box size ) + bottom of base = PO

Widest part of formation is 7 boxes.

7 x 3 (three box reversal) = 21
21 x 1 (box size) = 21.
Add 21 to the bottom of the base
which is 20
21+ 20 = 41.
Horizontal Price objective is 41.

Next

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Welcome:
Lesson 2: Part 2 - Price Objectives - Horizontal Count.

Bearish horizontal count.

Once a sell signal is given, count across
the base the stock has built.
Multiply the number of columns across the
formation by 2 and then multiply that
product by the value per box.
Add this number to the bottom of the
formation.
As with the bearish vertical count we
multiply the bearish objective by 2.

Let's break it down.

1: 2.
Make sure there is a sell signal off an Find the widest part of the base unbroken,
accumulated base. that can be counted.

3: 4:
Count the columns. Find the top of the base. Sometimes this is a
judgment call .

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5:
Calculate the PO.

Formula: (# boxes across)(2)(box size)- Top of base = PO

Widest part of formation is 8 boxes.
8 x 2 (bearish is 2) = 16
16 x 1 (box size) = 16
Subtract 16 from the top of the base which is 34
34 -16 = 18
Horizontal Price objective is 18.

Next

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Welcome:
Lesson 2: Part 2: Price Objectives

Price Objectives with different box sizes.

Now that you have the basics down for doing the vertical and horizontal counts
adding the different box size calculations will be easier. The box size changes do
effect the price objectives of the chart. This is because we are measuring the
strength of the move off the bottom and that is measured by the movement in price.
So, when the scale changes we must adjust. Sometimes, when a chart crosses
over two different box sizes you have to do the calculation twice and add together.
Let's start with a table of the calculations.
Bullish Vertical Counts:
Example: We have 10 X's in a
Price
Box Size Formula column to count. Bottom X is a
Objective
variable.
0.25 (X)(3) = (?)(.25) + bottom X = (10)(3) = (30)(.25) = 7.5 + 1.25 8.75
PO = 8.75.
0.50 (X)(3) = (?)(.50) + bottom X = (10)(3) = (30)(.50) = 15 + 12.50 27.50
PO = 27.50.
1.00 (X)(3) = (?)(1) + bottom X = (10)(3) = (30)(1) = 30 + 21 = 51
PO 51.
2.00 (X)(3) = (?)(2) + bottom X = (10)(3) = (30)(2) = 60 + 102 = 162
PO 162.

Examples:
0.25 Box Size. .50 Box Size
3.50 X <--10 X's. 17.00 X <--10 X's.
3.25 X O 16.50 X O
3.00 X O 16.00 X O
2.75 X O 15.50 X O
2.50 X X 15.00 X X
2.25 X X X 14.50 X X X
2.00 X O X O X 14.00 X O X O X
1.75 X O X O X 13.50 X O X O X
1.50 O O X 13.00 O O X
1.25 O X<-Bottom X. 12.50 O X<-Bottom X.
1.00 O 12.00 O
(10)(3) = (30)(.25) = 7.5 + 1.25 = 8.75. (10)(3) = (30)(.50) = 15 + 12.50 = 27.50.

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1.00 Box Size 2.0 Box Size

30 X <--10 X's. 120 X <--10 X's.
29 X O 118 X O
28 X O 116 X O
27 X O 114 X O
26 X X 112 X X
25 X X X 110 X X X
24 X O X O X 108 X O X O X
23 X O X O X 106 X O X O X
22 O O X 104 O O X
21 O X<-Bottom X. 102 O X<-Bottom X.
20 O 100 O
(10)(3) = (30)(1) = 30 + 21 = 51. (10)(3) = (30)(2) = 60 + 102 = 162.

You can see here how the momentum changes as the box sizes become higher.
Bearish Vertical Counts:
Example: We have 5 O's in
Price
Box Size Formula a column to count. Top O is
Objective
variable.
0.25 (O)(2)=(?)(.25) = ? Top O -? = (5)(2) = (10)(.25) = 2.5. 5 - 2.5
PO 2.5 = 2.55.
0.50 (O)(2)=(?)(.50) = ? Top O -? = (5)(2) = (10)(.50) = 5. 15 -5 10.
PO = 10.
1.00 (O)(2)=(?)(1) = ? Top O -? = PO (5)(2) = (10)(1) = 10. 50 -10 40.
= 40.
2.00 (O)(2)=(?)(2) = ? Top O -? = PO (5)(2) = (10)(2) = 20. 150 - 130.
20 = 130.

Examples:
0.25 Box Size. .50 Box Size
5.50 X 15.50 X
5.00 X X O <-Top O 15.00 X X O <-Top O
4.75 X X O X O X 14.55 X X O X O X
4.50 X O X O X O X 14.00 X O X O X O X
4.25 X O O O X 13.50 X O O O X
4.00 O <--5 O's 13.00 O <--5 O's
3.75 12.50
3.50 12.00
(5)(2) = (10)(.25) = 2.5. 5 -2.5 = 2.5. (5)(2) = (10)(.50) = 5 15 - 5 = 10.
1.00 Box Size 2.00 Box Size
51 X 152 X
50 X X O <-Top O 150 X X O <-Top O
49 X X O X O X 148 X X O X O X
48 X O X O X O X 146 X O X O X O X
47 X O O O X 144 X O O O X
46 O <--5 O's 142 O <--5 O's
45 140
44 138

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(5)(2) = (10)(1) = 10 50 -10 = 40. (5)(2) = (10)(2) = 20 150 - 20 = 130.

For Horizontal Counts it is the same thing. You take the box size and put it into the
appropriate slot for calculation.
Bullish Horizontal Count.
Example. We have 10 boxes
Box Price
Formula and the bottom of the base is
Size Objective
a variable.
(boxes)(3) = (?)(.25) + bottom of (10)(3) = (30)(.25) = 7.5 + 3.5
0.25 11
base = PO = 11.
(boxes)(3) = (?)(.50) + bottom of (10)(3) = (30)(.50) = 15 + 15 =
0.50 30
base = PO 30.
(boxes)(3) = (?)(1) + bottom of (10)(3) = (30)(1) = 30 + 35 =
1.00 65
base = PO 65.
(boxes)(3) = (?)(2) + bottom of (10)(3) = (30)(2) = 60 + 102 =
2.00 162
base = PO 162.

Bearish Horizontal Count.

Example. We have 10 boxes
Box Price
Formula and the bottom of the base is
Size Objective
a variable.
(boxes)(2) = (?)(.25) = ? Top of (10)(2) = (20)(.25) = 5. 5 -
0.25 1.5
base -? = PO 3.5 = .1.5
(boxes)(2) = (?)(.50) = ? Top of (10)(2) = (20)(.50) = 10. 15
0.50 5
base -? = PO -10 = .5
(boxes)(2) = (?)(1) = ? Top of (10)(2) = (20)(1) = 20. 30 -
1.00 10
base -? = PO 20 = .10
(boxes)(2) = (?)(2) = ? Top of (10)(2) = (20)(2) = 40. 150 -
2.00 110
base -? = PO 40 = .110

Next

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PnF University

Welcome:
Lesson 2: Part 2: Price Objectives

Calculations through changing box sizes.

This is where the vertical counts becomes confusing but as long as you understand the different calculations for the box
sizes, you will be able to do this easily. Just add the two calculations together.
You will not have this type of calculation with the Horizontal count because it inherently does not cross different box
sizes, only the vertical count.
.25 to the .50 Box Size .50 to 1.00 Box Size 1.00 to 2.00 Box Size

Count the X's from the bottom X to the Count the X's from the bottom X to the Count the X's from the bottom X to the
change of count. Here it is three change of count. Here it is four boxes. change of count. Here it is three
boxes. Do the calculation for the .25 Do the calculation for the .50 box boxes. Do the calculation for the 1 box
box scale. scale. scale.
3 x 3 = 9 x .25 = 2.25 4 x 3 = 12 x .50 = 6 3 x 3 = 9 x .1 = 9
Now count the remaining X's, which is Now count the remaining X's, which is Now count the remaining X's, which is
7, and do the calculation for the .50 6, and do the calculation for the .50 7, and do the calculation for the 2 box
box scale. box scale. scale.
7 x 3 = 21 x .50 = 10.5. 6 x 3 = 18 x 1 = 18. 7 x 3 = 21 x 2 = 42.
Add the two totals together. Add the two totals together. Add the two totals together.
2.25 + 10.5 = 12.75 + 4.50 = 17.25 6 + 18 = 24 + 18.50 = 42.50 9 + 42 = 51 + 98 = 149
Price objective is 17.50 We round up Price objective is 43. We round up Price objective is 149
since it falls into the .50 box scale. since it falls into the 1 box scale.

Calculation for O's

Remember that you multiply by 2 not 3 for the three box reversal. Everything is in reverse so be aware of which box sizes
you are multiplying.
.25 to the .50 Box Size .50 to 1.00 Box Size 1.00 to 2.00 Box Size

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PnF University

Count the O's from the top O to the Count the O's from the top O to the Count the O's from the top O to the
change of count. Here it is two boxes. change of count. Here it is three boxes. change of count. Here it is three
Do the calculation for the .50 box Do the calculation for the 1 box scale. boxes. Do the calculation for the 2
scale. 3x2=6x1=6 box scale.
2 x 2 = 4 x .50 = 2 3 x 2 = 6 x 2 = 12

Now count the remaining O's, which is Now count the remaining O's, which is Now count the remaining O's, which
four, and do the calculation for the .25 three, and do the calculation for the .50 is four, and do the calculation for the
box scale. box scale. 1 box scale.
4 x 2 = 8 x .25 = 2. 3 x 2 = 6 x .50 = 3. 4 x 2 = 8 x 1 = 8.

Add the two totals together. Add the two totals together. Add the two totals together.
2 + 2 = 4. 6 + 3 = 9. 12 + 8 = 20.
5.50 - 4 = 1.50 22 - 9 = 13 102 - 20 = 82
Price objective is 1.50 Price objective is 13 Price objective is 82

Next

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PnF University

Welcome:
Lesson 2: Part 2: Price Objectives

Some Charts to example the Vertical Count.

We'll use charts as they appear on a database.

84 X X <--Stock almost hit price objective.

83 X O X O This is why we say it is a guide not
82 X O X O an absolute.
81 X O X O
80 --------------X O X O X -------
79 X O X O X O
78 X O X O X O
77 X O O X O
76 X O X O
75 --------------X ----O ---------
74 3
73 X
72 X
71 X
70 --------------X ---------------
69 X
68 X
67 X X X
66 X O X <--Buy Signal. This is the column of X's to count.
65 --X O X --X O X -------------
64 X O X O X O <--Reversal to O's terminating the coulumn of X's.
63 X O 2 O X
62 X O X O X
61 X O X O X
60 --X O --O X ------------* -
59 X O <--Sell Signal.
58 X O X <--Bottom X
57 1 O *

10 x 3 = 30 x 1 = 30 + 58 = 88. Price objective is 88

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53 A
<--Buy Signal
52 X O X X Top
51 X O O X O X
50 -------------X O X O X
O --------------------
49 X O O X 9 X
48 7 O 8 O
47 X X O <--Sell Signal. Count this column of O's
45 ---------X O X --------O X <--Reversal into X's terminating column of O's.
44 X O X O X O X O X X O *
43 X 5 O O X O X O X O X O
42 X O X O O X O X O X X O
41 X O X O X O X B X O X O
40 -----X O ------------------O X O X O X O X Med
39 X 4 O O O X O X
38 X O X O X O
37 X O X O X
36 3 O X
35 -----------------------------------O -<--Stock came very close
34 to the bearish vertical count

10 x 2 = 20 x 1 = 20. 52 - 20 = 32. Price objective is 32.

Horizontal Price Objective.

59 | X <--Breakout of base.
58 | X X
57 | X X O X
56 | X O X O X
55 -----+---X --X O ----------------X O X ------
54 X | X O X O X O X
53 X O | X O X O X X X X O X
52 X O | X O X O X O X O X O X O X Med
51 X O X X O X O X O X O X X O X O X
50 -X O X O X O X O X O X O X O X 3 X O <--Widest part
49 X O X O X O X O O O X O X O X of base unbroken.
48 X O X 1 X O X O X O X O
47 X O X O X O 2 O X O
46 X O | O X O X O *
45 -X --| O X O X --------------------* -------
44 X | O O <--Base support level.

18 x 3 = 54 x 1 = 54 + 44 = 98. Price objective is 98.

Next

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PnF University

Welcome:
Lesson 2: Wrap Up

The battle between Supply and Demand is at the heart of Point and Figure Charting.

From this chapter you have all the basics needed to understand patterns and price
objectives. You can see how the price movement in a stock creates the patterns. These
patterns tell the story of the battle between supply or demand.

Once you have a good understanding of how charts develop and build your confidence with
practice, you will be able to recognize chart development quickly and accurately. Once you
know the basics you can apply your understanding to any PnF chart.

Price objective is a guide, not an absolute. It is useful in helping to determine the risk reward
parameters of a trade. Always remember that PnF is an art form, not a science.

Lesson 2 Contents:
Part 1: Chart Patterns Part 2: Price Objectives

Battle between supply and demand Vertical Price Objective

Double Top/Double Bottom Bullish Vertical Count
Triple Top/Triple Bottom Bearish Vertical Count
Catapult formations Horizontal Price Objective
Triangle formations Bullish Horizontal Count
Spread Triple Tops Bearish Horizontal Count
Shakeout formations Price Objectives with different box sizes.
Signal Reversed Patterns Calculations through changing box sizes.
Long Tail Down Examples
High Pole

We will now test you to find your comprehension of the subjects discussed in Lesson 2.

Next

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PnF University

Welcome:
Lesson 2: Part 2: Price Objectives

Calculations through changing box sizes.

This is where the vertical counts becomes confusing but as long as you understand the different calculations for the box
sizes, you will be able to do this easily. Just add the two calculations together.
You will not have this type of calculation with the Horizontal count because it inherently does not cross different box
sizes, only the vertical count.
.25 to the .50 Box Size .50 to 1.00 Box Size 1.00 to 2.00 Box Size

Count the X's from the bottom X to the Count the X's from the bottom X to the Count the X's from the bottom X to the
change of count. Here it is three change of count. Here it is four boxes. change of count. Here it is three
boxes. Do the calculation for the .25 Do the calculation for the .50 box boxes. Do the calculation for the 1 box
box scale. scale. scale.
3 x 3 = 9 x .25 = 2.25 4 x 3 = 12 x .50 = 6 3 x 3 = 9 x .1 = 9
Now count the remaining X's, which is Now count the remaining X's, which is Now count the remaining X's, which is
7, and do the calculation for the .50 6, and do the calculation for the .50 7, and do the calculation for the 2 box
box scale. box scale. scale.
7 x 3 = 21 x .50 = 10.5. 6 x 3 = 18 x 1 = 18. 7 x 3 = 21 x 2 = 42.
Add the two totals together. Add the two totals together. Add the two totals together.
2.25 + 10.5 = 12.75 + 4.50 = 17.25 6 + 18 = 24 + 18.50 = 42.50 9 + 42 = 51 + 98 = 149
Price objective is 17.50 We round up Price objective is 43. We round up Price objective is 149
since it falls into the .50 box scale. since it falls into the 1 box scale.

Calculation for O's

Remember that you multiply by 2 not 3 for the three box reversal. Everything is in reverse so be aware of which box sizes
you are multiplying.
.25 to the .50 Box Size .50 to 1.00 Box Size 1.00 to 2.00 Box Size

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PnF University

Count the O's from the top O to the Count the O's from the top O to the Count the O's from the top O to the
change of count. Here it is two boxes. change of count. Here it is three boxes. change of count. Here it is three
Do the calculation for the .50 box Do the calculation for the 1 box scale. boxes. Do the calculation for the 2
scale. 3x2=6x1=6 box scale.
2 x 2 = 4 x .50 = 2 3 x 2 = 6 x 2 = 12

Now count the remaining O's, which is Now count the remaining O's, which is Now count the remaining O's, which
four, and do the calculation for the .25 three, and do the calculation for the .50 is four, and do the calculation for the
box scale. box scale. 1 box scale.
4 x 2 = 8 x .25 = 2. 3 x 2 = 6 x .50 = 3. 4 x 2 = 8 x 1 = 8.

Add the two totals together. Add the two totals together. Add the two totals together.
2 + 2 = 4. 6 + 3 = 9. 12 + 8 = 20.
5.50 - 4 = 1.50 22 - 9 = 13 102 - 20 = 82
Price objective is 1.50 Price objective is 13 Price objective is 82

Next

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PnF University

Welcome:
Lesson 2: Part 2: Price Objectives

Some Charts to example the Vertical Count.

We'll use charts as they appear on a database.

84 X X <--Stock almost hit price objective.

83 X O X O This is why we say it is a guide not
82 X O X O an absolute.
81 X O X O
80 --------------X O X O X -------
79 X O X O X O
78 X O X O X O
77 X O O X O
76 X O X O
75 --------------X ----O ---------
74 3
73 X
72 X
71 X
70 --------------X ---------------
69 X
68 X
67 X X X
66 X O X <--Buy Signal. This is the column of X's to count.
65 --X O X --X O X -------------
64 X O X O X O <--Reversal to O's terminating the coulumn of X's.
63 X O 2 O X
62 X O X O X
61 X O X O X
60 --X O --O X ------------* -
59 X O <--Sell Signal.
58 X O X <--Bottom X
57 1 O *

10 x 3 = 30 x 1 = 30 + 58 = 88. Price objective is 88

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53 A
<--Buy Signal
52 X O X X Top
51 X O O X O X
50 -------------X O X O X
O --------------------
49 X O O X 9 X
48 7 O 8 O
47 X X O <--Sell Signal. Count this column of O's
45 ---------X O X --------O X <--Reversal into X's terminating column of O's.
44 X O X O X O X O X X O *
43 X 5 O O X O X O X O X O
42 X O X O O X O X O X X O
41 X O X O X O X B X O X O
40 -----X O ------------------O X O X O X O X Med
39 X 4 O O O X O X
38 X O X O X O
37 X O X O X
36 3 O X
35 -----------------------------------O -<--Stock came very close
34 to the bearish vertical count

10 x 2 = 20 x 1 = 20. 52 - 20 = 32. Price objective is 32.

Horizontal Price Objective.

59 | X <--Breakout of base.
58 | X X
57 | X X O X
56 | X O X O X
55 -----+---X --X O ----------------X O X ------
54 X | X O X O X O X
53 X O | X O X O X X X X O X
52 X O | X O X O X O X O X O X O X Med
51 X O X X O X O X O X O X X O X O X
50 -X O X O X O X O X O X O X O X 3 X O <--Widest part
49 X O X O X O X O O O X O X O X of base unbroken.
48 X O X 1 X O X O X O X O
47 X O X O X O 2 O X O
46 X O | O X O X O *
45 -X --| O X O X --------------------* -------
44 X | O O <--Base support level.

18 x 3 = 54 x 1 = 54 + 44 = 98. Price objective is 98.

Next

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PnF University

Welcome:
Lesson 2: Wrap Up

The battle between Supply and Demand is at the heart of Point and Figure Charting.

From this chapter you have all the basics needed to understand patterns and price
objectives. You can see how the price movement in a stock creates the patterns. These
patterns tell the story of the battle between supply or demand.

Once you have a good understanding of how charts develop and build your confidence with
practice, you will be able to recognize chart development quickly and accurately. Once you
know the basics you can apply your understanding to any PnF chart.

Price objective is a guide, not an absolute. It is useful in helping to determine the risk reward
parameters of a trade. Always remember that PnF is an art form, not a science.

Lesson 2 Contents:
Part 1: Chart Patterns Part 2: Price Objectives

Battle between supply and demand Vertical Price Objective

Double Top/Double Bottom Bullish Vertical Count
Triple Top/Triple Bottom Bearish Vertical Count
Catapult formations Horizontal Price Objective
Triangle formations Bullish Horizontal Count
Spread Triple Tops Bearish Horizontal Count
Shakeout formations Price Objectives with different box sizes.
Signal Reversed Patterns Calculations through changing box sizes.
Long Tail Down Examples
High Pole

We will now test you to find your comprehension of the subjects discussed in Lesson 2.

Next

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PnF University

Welcome:
Lesson 2: Part 1. Chart Patterns

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
imparative that you understand
them.
A buy signal shows A sell signal shows
demand is in control of supply is in control. In
the stock. It occurs this case the stock
when a column of X's exceeded the
exceeds the previous previous column of
colomn of X's. O's.
The Double Top Break Double Top Double Top Break
A double top break occurs when a
chart, in X's, runs into resistance.
Supply gains control and the chart
reverses into O's. Demand then
regains control of the chart and it
reverses back into X's where it
rallies to the previous resistance.
Here the double top is formed.
When the chart is able exceed the
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 O's, falls to
support. Demand gains control
and the chart reverses into X's.
Supply then regains control of the
chart and it reverses back into O's
where it falls to the previous
support. Here the double bottom is

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formed. When the chart is able

exceed the this support level and
fall another box it gives the double
bottom break.
Double Bottom Double Bottom Break

The Supply and Demand Scenario.

Double Top:
1) For 2) Over
example, IBM the next
rises to $60 few
and meets weeks
selling demand
pressure. This once
selling again
pressure creeps
exceeds the back into
demand at that the stock
price and the stock retreats. Remember, and
it requires a three-box reversal to causes the price to rise to $60 per
change columns. In this example, the share. This is causes a three-box
selling pressure was enough to force reversal back up into a column of X's,
IBM back to $57, the chart reverses to and IBM now sits at the same level that
O's from X's. previously caused supply to enter the
market.

3) The If it is again repelled, then the sellers are

question still there. If it instead is able to move to
now is $61, then we can say that demand has
whether prevailed at this price by exceeding the
the level where supply had previously
sellers gained control. By exceeding this level
that of resistance the Point and Figure chart
forced the gives its most basic buy signal, the
stock Double Top Break.
back Demand is now in control of this stock.
before
are still there. The only way to find out if
the sellers are still operating at that price
is to see how IBM negotiates that level.
Double Bottom:

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1) In 2) Demand comes into the

this stock with the price rising to
57 and reverses the chart
into a column of X's.

pattern, supply wins the

match. Instead of IBM
exceeding the previous point
of resistance, it instead
reversed and exceeded the
previous level of support. Here
the stock first reverses down
into O's to the 54 level.
3) Summary:
Supply wins and the probability of lower prices
come into play. The reason supply overtook
demand is not important. What is important is
knowing that supply is in control, for in the end,
supply and demand cause stocks to move up and
down and nothing else.

The stock encounters selling

pressure which drives IBM
back down the chart to the 54
level where demand previously
took control providing support.
However this time, the buyers
are not there as before and the
selling pressure persists until
the stock exceeds that level of
support.
Supply again takes over and
the chart reverses back down
to 53 exceeding the support at
54 and creating a double
bottom sell signal at 53.

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More Examples:
Here the stock rises to $60 a
second time where it is
repelled. This shows there is
resistance at that level. The
column of O's exceeding the
previous column of O's gives
the double botom sell signal,
one of the most basic patterns.
At this point we do not have
enough pieces of the puzzle to
say whether to sell the stock.
As we conintue through the
university all the different
pieces will start to come
together.
This stock found good support
at 54. This is clearly shown on
the chart as the price where
columns of O's stopped. This
is one of the great advantages
of Point and Figure charts.
They are as clear as it gets.
There is no mistaking whether
a stock gave a buy or sell
signal. In this example, after
holding the support, demand
regains control and exceeds
the previous top at $57 giving
the double top buy signal.

The Bullish Signal

We add one more dimension, an
added clue, to the pattern this
time. In this next pattern, the last
column of O's does not extend
down as low as the previous
column of O's. We call that a rising
bottom. It signifies that supply is
becoming less a factor in driving
the stock. On the other side of the
coin, demand is getting stronger as
the last column of X's exceeds the
previous column of X's giving a
double top buy signal. The rising
bottom shows us that supply is
getting weaker providing added
guidance when evaluating the
supply-demand relationship of the
underlying stock.
The Bearish Signal

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Demand in this case is becoming

weaker as the last column of X's
fails to reach the previous level.
Selling pressure however is
increasing as evidenced by the
lower column of O's. These clues
simply suggest demand is losing
strength and supply is gaining
strength.

The Bullish and Bearish Signals here are part of Double Top/Double Bottom
patterns but when analyzing charts with all patterns types recognizing a series of
higher bottoms and tops or lower tops and bottoms is crucial in making the right
trade or investment decision.

So far we have discussed the Double Bottom and Double Top. All other other
patterns we will cover are expansions of this basic form. By now, you can see how
simple this method is to grasp.

Next

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PnF University

Welcome:
Lesson 2: Part 1. Chart Patterns

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
imparative that you understand
them.
A buy signal shows A sell signal shows
demand is in control of supply is in control. In
the stock. It occurs this case the stock
when a column of X's exceeded the
exceeds the previous previous column of
colomn of X's. O's.
The Double Top Break Double Top Double Top Break
A double top break occurs when a
chart, in X's, runs into resistance.
Supply gains control and the chart
reverses into O's. Demand then
regains control of the chart and it
reverses back into X's where it
rallies to the previous resistance.
Here the double top is formed.
When the chart is able exceed the
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 O's, falls to
support. Demand gains control
and the chart reverses into X's.
Supply then regains control of the
chart and it reverses back into O's
where it falls to the previous
support. Here the double bottom is

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formed. When the chart is able

exceed the this support level and
fall another box it gives the double
bottom break.
Double Bottom Double Bottom Break

The Supply and Demand Scenario.

Double Top:
1) For 2) Over
example, IBM the next
rises to $60 few
and meets weeks
selling demand
pressure. This once
selling again
pressure creeps
exceeds the back into
demand at that the stock
price and the stock retreats. Remember, and
it requires a three-box reversal to causes the price to rise to $60 per
change columns. In this example, the share. This is causes a three-box
selling pressure was enough to force reversal back up into a column of X's,
IBM back to $57, the chart reverses to and IBM now sits at the same level that
O's from X's. previously caused supply to enter the
market.

3) The If it is again repelled, then the sellers are

question still there. If it instead is able to move to
now is $61, then we can say that demand has
whether prevailed at this price by exceeding the
the level where supply had previously
sellers gained control. By exceeding this level
that of resistance the Point and Figure chart
forced the gives its most basic buy signal, the
stock Double Top Break.
back Demand is now in control of this stock.
before
are still there. The only way to find out if
the sellers are still operating at that price
is to see how IBM negotiates that level.
Double Bottom:

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1) In 2) Demand comes into the

this stock with the price rising to
57 and reverses the chart
into a column of X's.

pattern, supply wins the

match. Instead of IBM
exceeding the previous point
of resistance, it instead
reversed and exceeded the
previous level of support. Here
the stock first reverses down
into O's to the 54 level.
3) Summary:
Supply wins and the probability of lower prices
come into play. The reason supply overtook
demand is not important. What is important is
knowing that supply is in control, for in the end,
supply and demand cause stocks to move up and
down and nothing else.

The stock encounters selling

pressure which drives IBM
back down the chart to the 54
level where demand previously
took control providing support.
However this time, the buyers
are not there as before and the
selling pressure persists until
the stock exceeds that level of
support.
Supply again takes over and
the chart reverses back down
to 53 exceeding the support at
54 and creating a double
bottom sell signal at 53.

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More Examples:
Here the stock rises to $60 a
second time where it is
repelled. This shows there is
resistance at that level. The
column of O's exceeding the
previous column of O's gives
the double botom sell signal,
one of the most basic patterns.
At this point we do not have
enough pieces of the puzzle to
say whether to sell the stock.
As we conintue through the
university all the different
pieces will start to come
together.
This stock found good support
at 54. This is clearly shown on
the chart as the price where
columns of O's stopped. This
is one of the great advantages
of Point and Figure charts.
They are as clear as it gets.
There is no mistaking whether
a stock gave a buy or sell
signal. In this example, after
holding the support, demand
regains control and exceeds
the previous top at $57 giving
the double top buy signal.

The Bullish Signal

We add one more dimension, an
added clue, to the pattern this
time. In this next pattern, the last
column of O's does not extend
down as low as the previous
column of O's. We call that a rising
bottom. It signifies that supply is
becoming less a factor in driving
the stock. On the other side of the
coin, demand is getting stronger as
the last column of X's exceeds the
previous column of X's giving a
double top buy signal. The rising
bottom shows us that supply is
getting weaker providing added
guidance when evaluating the
supply-demand relationship of the
underlying stock.
The Bearish Signal

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Demand in this case is becoming

weaker as the last column of X's
fails to reach the previous level.
Selling pressure however is
increasing as evidenced by the
lower column of O's. These clues
simply suggest demand is losing
strength and supply is gaining
strength.

The Bullish and Bearish Signals here are part of Double Top/Double Bottom
patterns but when analyzing charts with all patterns types recognizing a series of
higher bottoms and tops or lower tops and bottoms is crucial in making the right
trade or investment decision.

So far we have discussed the Double Bottom and Double Top. All other other
patterns we will cover are expansions of this basic form. By now, you can see how
simple this method is to grasp.

Next

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Welcome:
Lesson 2: Part 1 continued... Chart Patterns

Bearish Catapult
This can be interpreted exactly opposite the Bullish Catapult formation and is particularly
useful in timing short sales as it clearly shows supply in control. Watch carefully for this
pattern because it suggests lower prices from the underlying stock. Below is an example of
how it is formed.

First the Then the Then the Double Completed:

Triple Bottom ... Double Bottom... Bottom Break... A triple bottom followed
by a double bottom break

Let's break this down some more.

Interpreting what this In the same respects of a Bullish Catapult being
formation is telling us a confidence builder the
we first see the Triple Bearish Catapult is a
Bottom break, which confirmation of a stock
you have already breaking down. The Triple
learned is very Bottom sell signal is then
negative for the stock. followed by a lower top and a
Double Bottom sell signal,
two sell signals in a row
along with a lower top.

These two signals together clearly show supply coming into control of the stock and demand
drying up.

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Looking at the two stocks to the right. If they Bullish Catapult Bearish Catapult
are both recommended on a fundamental
basis, in the in the same sector and at the
same price, Which one would you buy?
Clearly, you would pick the one on the left.
The beauty of Point and Figure is that it is
very visual, very easy to see which stocks
are rising and which are breaking down.

The Triangle Formation

The Triangle formation is easily identified by the higher
bottoms and lower tops. This sounds a little backwards
but what is happening is that the chart is a bit confused.
There is no clear winner in the battle between Supply
and Demand. As the lower tops and higher bottoms
develop the chart comes to a point creating the triangle
look of the pattern. When the chart comes to a point
either supply or demand will have to gain control and
either a double top break or a double bottom break will
be given. A break to the upside designates a Bullish
Triangle and a break to the downside designates a
Bearish Triangle. To qualify as a Triangle, the pattern
must have at least five vertical columns. Examples of
the Bullish and Bearish Triangle are below. 5 columns needed to complete a
triangle.
Bullish Triangle

If the pattern resolves itself up, it will give a double top

buy signal. The Double Top buy signal simply suggests
that demand has won the match and the probability is
higher prices in the stock.

Bearish Triangle

If the pattern breaks down the match is won by supply.

The Double Bottom sell signal suggests that the
probability is lower prices in the stock.

Spread Triple Top Pattern and Spread Triple Bottom Pattern.

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This pattern is basically the same as the triple top and triple bottom with one exception. The
testing of the support or resistance level is not completed in three consecutive columns. For
example, a stock may rally and test 55 twice, then on the third trip back up it only reaches 53
before it pulls back again. Then on the fourth atempt it is able to break the 55 level. The
stock still exceeds the 55 level it tested three times but there was a "spread" between the
second and third atempt. This is one that is best understood by looking at an example.

Spread Triple Top Spread Triple Top Spread Triple Bottom. Spread Triple Bottom
A gap in between break. A gap in between three break
three columns of X's A column of X's column of O's at the A column of O's
at the same level. exceeds the spread same level. exceeds the spread
triple top. triple bottom.

The same philosophy applies with these patterns as the Triple Top and Bottom. We will take
a look from the Triple Top perspective. In each case, the stock rises to a certain price level
and is repelled two times. The third attempt at that price is successful by the stock moving
through the level shown by a column of X's exceeding the point of resistance. Since the
stock was repelled twice at that same level, there are apparently sell orders there. The
reason is not important. What is important is that you know there are sellers at that particular
level. The only way to know if demand can overtake the selling pressure is to see how the
stock negotiates the level again. Simply stated, if the stock is repelled again at this level of
resistance, the sellers are still there. You need not know any more. If the stocks exceeds that
level, then demand has overcome the supply that previously caused it to reverse.

Notice that in the following two patterns, the stocks are trading at the same price. Consider
that both stocks are fundamentally sound and each is being recommended by a major firm
on Wall Street. Both stocks are in the same industry group and pay about the same dividend.
You have studied the fundamentals of the two stocks and are now trying to determine which
stock to buy. It's the moment of truth. Which stock do you select?

Stock A: Spread Triple Top Stock B: Spread Triple Bottom

Without the chart patterns shown here, you would be in a quandary. Looking at the
fundamental data alone, both stocks are equal, therefore both stocks should do about as well

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in the future. Not so. If you had the benefit of evaluating the Point and Figure charts the
selection process would become much easier. With the information and charts above which
stock do you select? It doesn't take an in-depth understanding of this method to determine
Stock A is on a buy signal with the probability of higher prices and Stock B is on a sell signal
with lower prices likely.

This simple exercise shows why charts are so important and why you can achieve the best
results in the market when you use both fundamental and technical analysis.

Next

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PnF University

Welcome:
Lesson 3: Introduction

Now that you understand how patterns develop and In this section we will list
what is a bullish or bearish signal, this chapter will any upcoming live online
teach you how to gauge those signals against the classes specifically
market using relative strength. covering this chapter.
In any market there are always leaders and laggards. Message Board
Our goal as investors, is to have a portfolio of leaders,
not laggards. The tool we use to determine which
stocks and sectors are the leaders is Relative Strength.

Lesson 3 Contents:
Part 1: Relative Strength Part 2:

Evaluating Coca-Cola Example

Potential Scenarios Wal-Mart Example
Formula Various Examples

Test yourself at the end of the chapter to sharpen your skills.

If you have any questions, please check the "Questions" section to see if it has
already been answered. If it has not, then click on the question mark icon below to
email us your question. It will be answered shortly (within two business days).

Next

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 Error! FoxWeb Foundation Program

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Here is what happened:
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Lesson 3: Part 1 - Relative Strength

One of the most important Example of an RS chart from the DWA database
tools in a Point and Figure
toolbox is the relative 9.0 ----+-+-+---------------
strength chart. The basic
objective of all investors is 8.5 | | |
to outperform the broad 8.0 ----| | | --------------
averages and the only whay 7.5 | | |
to do that is to own stocks 7.0 ----| | 3 --------------
that are outperforming the
averages. The best way to
6.5 | | X O
tell whether your stock is 6.0 ----| | X O ------------
outperforming is to evaluate 5.5 | | 2 5
its performance relative to a 5.0 ----| | X O ------------
market average. 4.75 | | 1
Relative strength 4.50 ----| | X --------------
calculations help investors 4.25 | | C
choose between stocks that 4.00 ----| | X --------------
superficially appear to be
similar. Let's say you were
3.75 | | X
evaluating three stocks in 3.50 ----| | B --------------
the same industry group. 3.25 | | 9
Each stock is fundamentally 3.00 ----| | 2 --------------
sound and the Point and 2.75 | | 1
Figure trend charts are
similar. The only difference 2.50 ----| | X --------------
between the three stocks is 2.25 7 | C
that only one has a positive 2.00 ----4 O 8 --------------
relative strength chart. 1.75 A O 7
Which one do you choose?
The logical selection would 1.50 ----8 6 X --------------
be the stock with the 1.25 7 O X
positive relative strength 1.00 ----X O | --------------
chart. 0.75 1 | |
Relative strength charts are 0.50 ----X | | --------------
very long-term and are only 0.25 X | |
updated once a week 0.00 ----A +-+---------------
(although, you can see a 9 9 9 9 0
progression of the RS daily
on the DWA site). These 6 7 8 9 0

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charts don't speak often, but

when they do you should
listen. In many cases, the
market is in a condition
where the defensive team
should be on the field and
you should not be buying
stocks but moving to 100%
cash doesn't make sense.
In such markets, relative
strength really comes in
handy as these charts
clearly show those stocks
which are outperforming
relative to the averages
even though they might be
declining in price. In down
markets, it pays to keep lists
of stocks that are
demonstrating superior
relative strength versus the
broad averages. These
strong stocks will be your
buy list when the offensive
team comes back on the
field. Have patience and try
to make long stock
commitments only when the
odds are in your favor.

When looking at a Relative Strength Chart we examine the buy and sell signals as
well as the current column. A Relative Strength (RS) buy or sell signal lasts on
average 2 to 2 1/2 years. A column change can indicate performance for the next
6 to 8 months, so it is very important to watch as well.

At DWA there are currently two Relative Strength (RS) calculations to use; one the
standard and main RS versus the Dow Jones Industrial, and the other is one
developed by DWA, the RS versus the sector. We will concentrate primarily on the
RS versus the Dow.

RS Reading is plotted on a PnF chart. A double top signals a positive relative

strength reading and a double bottom signals a negative relative strength reading.
A RS on a "buy" signal is one that has broken a double top and an RS on a "sell"
is one that has broken a double bottom.

Positive relative strength doesn't mean the stock has to go up and vice versa. It
just means it is out performing or under performing the market. For instance, if the
market goes up 15% and a negative RS stock goes up 5%, it has under performed
just as the RS chart suggested. Conversely, if the market goes down 20% but a
positive RS stock only goes down 10% then it has done as expected, performed
better than the market.
There are four potential scenarios for a PnF chart. They are as follows:

RS on a

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Buy
signal in
a
column
of X's.
This is
the

strongest reading for an RS chart. It has been consistently out performing and still
is.

RS on a Buy signal in a column of O's. This means the stock has been
consistently out performing, is taking a breather.

RS on a Sell signal in a column of X's. The stock has been under performing
most of the time but currently may be on a run. This is good for short term traders
that are in and out of stocks.

RS on a Sell signal and in a column of O's. The worst of all RS conditions. Has
been and still is under performing the market.

Next

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Lesson 3: Part 1 Relative Strength (Cont.)

The stock price is divided by the Dow close and then multiplied by 1000. This
formula gives you the RS reading which is then plotted on a Point and Figure chart.
This calculation is perfomed on a weekly basis using Tuesdays closing prices.
Consider the following example. (This example is used just to show you the math.)
Your stock is trading at $80 per share and We pick up the RS chart with this
Dow Jones is at the 10,000 level picture.
(numbers created for easy calculation). To
determine how your stock is trading
12.5
relative to the Dow, you would simply 12.0
divide the price of the stock by the Dow, 11.5
multiply by 1000 and then plot the 11.0
resulting number exactly as you would a 10.5
normal Point and Figure chart. If we divide
$80 by 10,000, multiply by 1000 we get a 10.0
figure of 8. This can then be plotted on a 9.5
graph similar to the one we use for plotting 9.0
the actual price of the stock. The charting 8.5
principles are the same as when updating
these charts. We first look to see if the 8.0 X <-The RS plotted
chart can continue in the same direction. If
not then check for a reversal.

Date: 2/2/??
Dow Jones: 10000
Stock Price: 80
Calculation: 80 divided by 10000 x 1000
=8

A different example...

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Date: 3/2/?? 9.5

Dow Jones: 11,000. 9.0
XYZ Corp: 81.
Calculation: (81 / 11000)(1000) =
8.5
7.36 8.0
7.5
7.36 as you can see is not a 7.0 X <--RS plotted.
number on the chart but as with 6.5 X
the trend charts we either round up
or round down to the correct 6.0 X
amount. 7.36 is not enough to plot 5.5 X
7.5 so we use 7.0 5.0
4.5

Date: 3/9/?? 9.5

Dow Jones: 9500 9.0
XYZ Corp: 74
Calculation: (74 / 9500)(1000) =
8.5
7.79. 8.0
7.5 X <--added another X
The Dow has dropped as has the 7.0 X
stock but the RS has improved.
Like the first example 7.79 is not 6.5 X
enough to fill in the 8.0 box so we 6.0 X
mark up only to the 7.5 box. 5.5 X
5.0
While the stock price has fallen
and the market has fallen, the 4.75
relative strength calculation has
actually moved higher. This means
the stock is performing better
relative to the market.

When starting an RS chart it is just like beginning a trend chart in PnF. You must
determine which direction the chart is heading before you can plot it. For stocks
that have been trading for some time you can get a history of the stock price and
Dow and do your own calculations to determine if the RS has been moving up or
down. In the case of an IPO however, the history is not there and you must wait for
the calculations to guide you. Just keep a running list of the readings.

Next

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Welcome:
Lesson 3: Part 2 - Examples

Let's look at an example of a Relative Strength chart with Coca-Cola (KO)

Clearly KO has under performed since the RS sell signal 9.5 | | X | |

on 1/12/99. The current reversal up to X's is a positive 9.0 ----8 +-6 O +--------
sign but an RS reading of 6.5 would be required for a
Relative Strength buy signal. 8.5 7 O X O |
8.0 ----5 O X 9 +--------
January 12, 1999 7.5 A 9 O |
KO : 65.438 7.0 ----B +---1 <--1/12/99
DJIA: 9474.68
6.5 C | 3 |
June 19, 2000 6.0 ----X +---6 B -------
KO: 54.438 5.5 B | 8 X O
DJIA: 10557.83
5.0 ----8 +---9 X O 5 ---
Performance from January 12, 1999 to June 19, 2000 4.75 4 | A | 3 X
KO: -16.8% 4.50 ----X +---+-+-O X ---
DJIA : +11.4% 4.25 A | | | O
4.00 ----8 +---+-+--------
3.75 5 | | |
3.50 ----B +---+-+--------
3.25 A | | |
3.00 ----X +---+-+--------
2.75 7 | | |
2.50 ----X +---+-+--------
2.25 X | | |
2.00 ----4 +---+-+--------
1.75 | | | |
0.25 8 9 9 9 9 9 0
0.00 --5 7 +-8 9 +-0 -----

Remember back to the very beginning in "Attributes of a chart" the description of the numbers and letters in the columns
of PnF chart - 1,2,3 or A, B, C? They designate the first action of a given month. We use the same numbers and letters
in a RS chart. They serve as useful guides to help you determine how a stock was performing at a given time. With so
little action on RS charts often there is no action during a given month. Below are a couple of examples of RS charts
along with their trend charts.

Some Examples:

Wal-Mart Stores (WMT).

The attributes of the chart are marked to correspond to the RS chart.

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Trend chart for WMT. Relative Strength Chart for WMT

7.5 | | | |
7.0---+-+-+---+------
6.5 | | | |
6.0---+-+-+---X ----
5.5 | | | C O
5.0 --+-+-X --X O ---
4.75 A | X O A 2<-Feb
4.50 -X O X O X -----
4.25 X O X 5 X
4.00 -X 4 X 8 +------
3.75 X 5 X |
3.50 -X 8 X --+------
3.25 X 1 X |
3.00 -C A X --+------
2.75 X 1 X |
2.50 -+-A 4 --+------
2.25 | C X |
2.00 -+-1 X --+------
1.75 | O | |
1.50 -+-+-+---+------
1.25 | | | |<-Year
1.00 -+-+-+---+------
0.75 | | | |
0.50 -+-+-+---+------
0.25 9 9 9 9 | 0
0.00 3 7 +-9 +-0 ---

You will notice that WMT for 1999 was trading above its BSL which you will remember as bullish.

Look at the RS chart for 1999 and you will see that in May (5) the RS reversed down, it was under performing
the market, and stayed that way until October (A) when it reversed up.
Now look at the trend chart. Find the A for October in 1999 and you will see that the chart breaks a triple top and
continues up. The RS indicated that WMT would out perform the market and we see on the trend chart that it did
in fact do well.

Look at the RS chart for 2000 where in February (2) it has again reversed down.
On the trend chart we see that WMT actually started to break down in January (1) of 2000.
Now look at the trend chart. Find the A for October in 1999 and you will see that the chart breaks a triple top and
continues up. The RS indicated that WMT would out perform the market and we see on the trend chart that it did

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in fact do well.

Here are the calculations for the WMT RS.

You can immediately see that the RS chart does not move like the trend
chart. It is much slower. Highlighted are the months as above. The trend 7.5 | | | |
chart above only lists part of 1999 to current. 7.0 -+-+-+---+----
Date Value 6.5 | | | |
03/14/2000 4.867 6.0 -+-+-+---X ---
03/13/2000 4.756 5.5 | | | C O
03/10/2000 4.847 5.0 -+-+-X --X O --
03/09/2000 4.920 4.75 A | X O A 2<-*
03/08/2000 4.902 4.50 -X O X O X ----
03/07/2000 4.874 4.25 X O X 5 X
03/06/2000 4.879 4.00 -X 4 X 8 +-----
03/03/2000 5.076 3.75 X 5 X |
03/02/2000 4.993 3.50 -X 8 X --+-----
03/01/2000 4.853 3.25 X 1 X |
02/29/2000 4.807 3.00 -C A X --+-----
02/28/2000 4.620 2.75 X 1 X |
02/25/2000 4.487 2.50 -+-A 4 --+-----
02/24/2000 4.422 2.25 | C X |
02/23/2000 4.633 <--The reversal down (*) 2.00 -+-1 X --+-----
02/22/2000 4.694 Plotted as 4.75 because 1.75 | O | |
02/18/2000 4.672 4.672 is not enough for 1.50 -+-+-+---+-----
02/17/2000 4.672 4.50 which would be the 1.25 | | | |
02/16/2000 5.006 next box down. 1.00 -+-+-+---+-----
02/15/2000 5.301 0.75 | | | |
02/14/2000 5.502 0.50 -+-+-+---+-----
02/11/2000 5.420 0.25 9 9 9 9 | 0
02/10/2000 5.396 0.00 3 7 +-9 +-0 ---
02/09/2000 5.386
02/08/2000 5.407 In order for WMT to reverse up
02/07/2000 5.060 on its chart it would have to
02/04/2000 5.136 move as high as 6.00. Looking at
02/03/2000 5.300 the calculations on the left you
02/02/2000 5.305 will see that WMT is improving
02/01/2000 5.315 but not enough for a reversal up.
If the market continues to wan
while WMT strengthens we could
see a reversal up in the RS.

here is the DOW chart for some of 1999 and 2000. Compare this with the
WMT RS chart.
7.5 | | | |
7.0 -+-+-+---+------
6.5 | | | |
6.0 -+-+-+---X -----
5.5 | | | C O
5.0 -+-+-X --X O ---
4.75 A | X O A 2<-*
4.50 -X O X O X -----
4.25 X O X 5 X
4.00 -X 4 X 8 +------
3.75 X 5 X |
3.50 -X 8 X --+------
3.25 X 1 X |
3.00 -C A X --+------

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2.75 X 1 X |
2.50 -+-A 4 --+------
2.25 | C X |
2.00 -+-1 X --+------
1.75 | O | |
1.50 -+-+-+---+------
1.25 | | | |
1.00 -+-+-+---+------
0.75 | | | |
0.50 -+-+-+---+------
0.25 9 9 9 9 | 0
0.00 3 7 +-9 +-0 ---
WMT outperformed the Dow
from October (A) until February
(2). If WMT is under performing
a chart that is breaking down this
is bad news for the stock. Look
back up to the WMT trend chart
and you will see that it continued
to break down through March.

You can see on the chart the Dow started to break down in February .

Next

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Welcome:
Lesson 3: Part 2 - Examples

Let's walk through a trend chart and its RS chart over the course of a year.

Trend Chart RS Chart

5.5 |
5.0 ----A
4.75 8
4.50 ----7
4.25 6
4.00 ----X
3.75 C
3.50 ----X
3.25 6
3.00 ----3
2.75 C
2.50 ----7
The RS and trend chart mirror each other in that
they each were moving up. The market at the
same time had been moving down.

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6.5 | |
6.0 ----+-+-
5.5 | |
5.0 ----A +-
4.75 8 O
4.50 ----7 O
4.25 6 O
4.00 ----X B <--November
3.75 C O
3.50 ----X C
3.25 6 O
3.00 ----3 O
2.75 C O
2.50 ----7 +-
Here the RS shows that for what ever reason
this stock was not keeping up with the improving
In November, the RS reverses down and Dow. The poor trend chart was confirmed by the
the trend chart shows a noticeable RS chart.
difference as it starts to break down. The
market during this time was starting to
improve and had given a couple of buy
signals.

6.5 | |
6.0 ----+-+-
5.5 | |
5.0 ----A +-
4.75 8 O
4.50 ----7 O
4.25 6 O
4.00 ----X B <--November
3.75 C O
3.50 ----X C <--December
3.25 6 O
3.00 ----3 O
2.75 C O
2.50 ----7 +-
The RS had reversed down in November (B)
telling us that the stock was to under perform
the market. Look what the trend chart did in
December (C). It collapsed - by the way, do you
know what pattern that is?
The market during this time from November to
December had climbed from 10,600 to 11,400 -
improving considerably. The RS for this stock
showed that it was not keeping up with the
accelerated rate of the Dow

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6.5 | |
6.0 ----+-+------
5.5 | |
5.0 ----A +-----
4.75 8 O
4.50 ----7 O X --
4.25 6 O X
4.00 ----X B 3 --
3.75 C O X
3.50 ----X C 2 --
3.25 6 O X
3.00 ----3 O X --
2.75 C O
2.50 ----7 +---
The trend chart bottomed and turned around
nicely giving some buy signals in January. The
market at this time started to wain. It dropped
from 11,400 to 10,600. However, this stock
continued up as did its RS into March while the
market continued down to 9,750.

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RS Chart Example with Calculations RS Calculations February and March

6.5 | | Date Value

6.0 ----+-+---------- 03/14/2000 4.517 <--X's are added
5.5 | | 03/13/2000 4.624
5.0 ----A +------------- 03/10/2000 4.734
4.75 8 O 03/09/2000 4.458
4.50 ----7 O X <--Top X. 03/08/2000 4.210
4.25 6 O X 03/07/2000 3.981
4.00 ----X B 3 <--Plotted. 03/06/2000 4.001
3.75 C O X 03/03/2000 3.919
3.50 ----X C 2 ---------- 03/02/2000 3.677
3.25 6 O X 03/01/2000 3.811
3.00 ----3 O X ---------- 02/29/2000 3.764
2.75 C O 02/28/2000 3.904
2.50 ----7 +-------------- 02/25/2000 3.955
02/24/2000 3.592
In order for another X to be added to this 02/23/2000 3.661
RS chart the figures would have to reach
4.75. The stock performed very well from 02/22/2000 3.688
3/7/00 to 3/14/00 with the chart actually 02/18/2000 3.676
rising from 3.75 to 4.50. 02/17/2000 3.775
02/16/2000 3.610
02/15/2000 3.557

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02/14/2000 3.701
02/11/2000 3.765
02/10/2000 3.817
02/09/2000 3.838
02/08/2000 3.725
02/07/2000 3.588
02/04/2000 3.654
02/03/2000 3.711
02/02/2000 3.681
02/01/2000 3.770

Stocks with positive relative strength have a tendency to out perform those with negative relative
strength. When making new stock commitments, try to find stocks with relative strength charts that
have turned positive within the past six months to a year. This helps ensure you have a stock with
lots of life left. Stocks whose relative strength has been positive for a long time might be close to
turning negative. This is why it is important to evaluate the relative strength chart itself rather than
simply accepting a positive or negative reading generated by a computer. Investing is still an art,
not a science.

In this example, you can see that if we

had waited until the relative strength
chart actually declined enough to
exceed a previous bottom and give a
sell signal, it would have been too late
as we would have missed to much of
the move. The reciprocal is true as well.
If a chart is so negative that its RS chart
shows a very long tail of O's down we
would call the first three-box reversal
back up the chart as turning positive.
Otherwise, by waiting for the buy signal
we would miss out on too much of a
move.

Some stocks are so strong that their relative strength charts go strait up in a long column of X's.
For the stock to turn from positive to negative relative strength, the chart would have to give a
double bottom break. When the relative strength chart has a long column of X's up, the underlying
stock would have to absolutely collapse to turn the relative strength chart negative by exceeding
its previous bottom. In this case, we will pay very close attention to the first three-box reversal in
the RS chart. In fact we would consider it negative until the RS reverses back up. In the case of
long columns we act without an actual signal. It simply makes common sense.

Human nature causes us to hang on to any thread of hope that the stock we bought was the right
one. Once all the technicals break down, we tend to look to the fundamentals to bail us out. It has
happened all too often. Even if you feel a stock is now a "good value" - don't hold your breath. A

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stock can stay a "good value" by not moving or, worse, drop another 10 points. Rather than take a
loss, most investors will hold on for the long term in the expectation the stock will come back. This
mentality enables the investor to maintain a portfolio of losers by ignoring the losers and taking
profits in the winners. Let profits run not losses.

Let's say you bought a stock at $30 in the software sector. Over time, the stock declines to $24
and the relative strength chart turns negative. Rather than sitting with the stock and wishing it back
up, why not find another stock around the same price in the same industry that has recently turned
positive on its relative strength chart and is both fundamentally and technically sound? Sell the bad
one and buy the good one. You have a much better chance of getting your money back with the
good stock. Always re-evaluate your stocks whenever there is a change in direction in the RS
chart.

As with all the lessons reading Tom's book along side will add some valuable information.

Next

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Welcome:
Lesson 3: Wrap Up

Relative strength is a calculation used for all stocks and indexes. One of the most
important aspects of analyzing a chart is to know how it compares to the
performance of the market. Naturally, you want to outperform the market and
continually improve your chances at doing so.
The RS calculations have proven successful towards this goal. Even sectors must
out perform or under perform the market at some point. Stacking odds in your
favor; if the market is bullish, the sector you are invested in is out performing the
bullish market and the stock you are invested in is out performing the sector that is
out performing the market.... that is stacking the odds in your favor. We will cover
Sector Relative Strength in Lesson 5.
Lesson 3 Contents:
Part 1: Relative Strength Part 2:

Evaluating Coca-Cola Example

Potential Scenarios Wal-Mart Example
Formula Various Examples

We will now test you to find your comprehension of the subjects discussed in
Lesson 3.

Next

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Testing for Lesson 3: Relative Strength.

1-3) Complete the formula for the Relative Strength reading by selecting the correct entry for each of the fields.

( -Select One- / - Select One - ) ( - Select One - ) = RS Reading

4-7) Answer the following with yes or no.

a. An RS on a "buy" signal can be in a column of O's yes no
b. Positive relative strength means the stock only goes up yes no
c. An RS on a buy signal and in a column of X's is the strongest reading for an RS chart yes no
d. RS on a sell signal in a column of O's is a great stock to mortgage your house, take a
personal loan, max your credit cards to put your whole life savings into yes no

8-11) Calculate the RS reading for each of the following:

(Numbers rounded to the third decimal.)

Dow Jones: 10500 Dow Jones: 10200

Stock Price: 102 Stock Price: 90
RS Reading: - Select One - RS Reading: - Select One -

Dow Jones: 11000 Dow Jones: 10500

Stock Price: 30 Stock Price: 29
RS Reading: - Select One - RS Reading: - Select One -

12-19) Determine the RS risk for the following stocks:

Relative Strength Chart Trend Chart

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Stock # 1
2.75 X 25 ------------------- ---
2.50 O X O ----------- 24 X
2.25 O 1 O X 23 X X O
2.00 O X 3 2 O ------- 22 X X O X O
1.75 O X 5 1 O 21 X O X O X O
1.50 A | 7 X 5 ------- 20 -X ------X O X O X -----Med
1.25 | 9 X 19.5 X O X X O X O 7
1.00 --| 3 ----------- 19.0 X O X O X O --O X ----
18.5 X O X O X O X *
18.0 X O --O ------O * ----

Given the RS information only,

Evaluate the RS chart. would you buy this stock here?
Choose one Choose one
Stock # 2 34
3.75 2 | | 33 X
3.50 --X O --+-------- 32 X O X
3.25 X O 7 | 31 * X O X
3.00 -A 6 X O 7 ----- 30 --* 4 --X --7 O X --
2.75 | 9 X O X 29 X O X O X O * Med
2.50 --+-3 --C X ----- 28 X X O X O X *
2.25 | | 1 27 X O X O 5 *
2.00 --+-+---+-------- 26 X O 3 *
1.75 25 --O X --* ----------
24 O X * Bot
23 O *
Given the RS information only,
Evaluate the RS chart. would you buy this stock here?
Choose one Choose one

Stock #3
3.00 --| | --| ------ 31 X X
2.75 8 | | X 30---------X O ----X O ---
2.50 ---7 O 7 | 6 O-- 29 X X O X O
2.25 6 O 6 O X O 28 X O X O X O Med
2.00 ---4 9 4 O X O-- 27 X O X O X X O
1.75 X A 1 8 26 6 O O X O X
1.50 ---X O X | ------ 25 O X ----O X O X ----
1.25 7 O X | 24 O X O 7
1.00 ---| O --| ------ 23 O X *
22 O *

Evaluate the RS chart. Given the RS information only,

would you buy this stock here?
Choose one

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Choose one
Stock #4
2.50 ----| | | | 3 --- 28 X
2.25 | | X | X O 27 X O
2.00 ----X | X O 2 O - 26 X O
1.75 B O C O X 5 25 ---------6 --X O X -
1.50 ----X O X 3 X --- 24 * X O 7 O X Med
1.25 X O X B 23 * X O X O X
1.00 ----5 2 | | ----- 22 X * X O X O
0.75 X | | | 21 X O * X O X
20 X O --* X O X -----
19.5 X O X X O X
19.0 X O X O X O ----* -
18.5 O X O X *

Evaluate the RS chart. Given the RS information only,

would you buy this stock here?
Choose one
Choose one

Score Test

Submit

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Triple Top Buy Signal

The Triple Top is exactly what The buy signal is given when the stock
the name suggests - a chart exceeds the level that previously caused
pattern that rises to a certain the stock to reverse down.
price level three times. The
first two times the stock visits
that level, it is repelled by
sellers. The third time the
stock rises to that level, it
forms the Triple Top.

There are many reasons why a stock will encounter supply at certain levels. Think back
to a time when you bought stock thinking it was at a bottom or at least an opportune
price level to buy. Instead of rising, the stock immediately declined. We have all had
experiences like that. The thought that probably crossed your mind as you saw the
stock lose value was that if the stock got back to even you were out! This is a perfectly
normal human reaction. When you place that order to get out at your break-even point,
you are in essence creating supply at that level. If more sellers are willing to sell their
stock at that level than buyers are willing to buy, the stock will decline. The only way we
know whether the selling pressure has been exhausted at a particular level is if the
stock is able to exceed that price. If the stock is repelled again, the sellers are still
there. The more times a stock pulls back from a resistance level, the stronger the
breakout will be when it comes. It was said years ago that the degree to which a stock
will rise is in exact proportion to the time the stock took in preparation for that move. In
other words, the wider the base from which a stock breaks out the higher the stock will
rise. This is why we consider the triple top break a stronger pattern than the double top.
Triple Bottom Sell Signal.
The Triple Bottom sell signal, like the Triple Top, has a high degree of reliability. It is
characterized by a stock falling to an area of support three times. The first two times
the stock holds and reverses up. The third time there is not enough demand to cause
the chart to reverse and instead it exceeds the two previous bottoms giving the triple
bottom sell signal.

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Consider What is he missing in this puzzle? What

for he is missing is that a battle between
a supply and demand has been completed
with supply winning the match.

moment an investor who buys a

stock at $31 per share and then
leaves on vacation for one month.
He checks the price frequently and
notices that his stock is still around
the price he paid for it, only down a
point. Not bad for a market that had
been volatile for the past month.
He feels comfortable with the stock
as the fundamentals remain in
place.

The probability of lower prices is very high. The Triple Bottom sell signal does not
mean that the stock will cave in immediately, it suggests that the risk in that position
has increased tremendously. Whether this investor chooses to do anything about the
signal or not, he should at least be aware of it. If the investor does nothing other than
increase his awareness of a potential decline, he is far ahead of the investor who
holds the same position without any warning. It is imparative to update the charts. By
doing so patterns such as this one will not sneak up on you.

The Bullish and Bearish Catapult Formation

The Bullish Catapult is a combination of the Triple Top buy signal and the Double Top
buy signal. This pattern is a confidence builder. The Catapult is created when a stock
gives a Triple Top buy signal whic is followed by a pullback producing a higher bottom.
Following the pullback, demand regains control and the stock reverses back up and
gives a Double Top buy signal. The charts below depict a Bullish Catapult formation.

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Bullish Catapult Completed:

First the Triple A triple top
Top... Then the Double Then the Double Top followed
Top... Break by a double top
break.

Notice the Triple Top buy signal followed by the pullback into a column of O's. Notice
how the column produces a higher bottom. The resumption of trend completes the
Catapult by giving a Double Top buy signal. To better understand what the Catapult is
saying, let's look at each piece of the pattern as illustrated above.
1.)The Triple Top is 2.)The subsequent
saying that the stock has reversal producing a
a very high probability of higher bottom
rising in price, assuming suggests that supply
the market is in a bullish is beginning to dry up
mode. or become a less
In fact, this type of pattern significant factor.
has a success probability
of 87.5% in bull markets.
3.)The This is a pattern that you can be
resumption of aggressive with especially when the
trend and overall markets are in a bullish mode, the
subsequent underlying sector is in a bullish mode, and
Double Top buy the fundamentals are superior in the stock
signal simply (we will cover all of these other aspects in
confirms the later lessons.).
Triple Top. This
is why it is called
a confidence
builder.

Next

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Welcome:
Lesson 2: Part 1 continued... Chart Patterns

The Shakeout Formation.

This pattern has a high degree of reliability. The Shakeout is relatively new and we
have found it very useful in real-life application. It is called the Shakeout because
the pattern is deceiving causing some holder of the stock to sell, in effect "shaking
out" these weak holders.

For the pattern to be a true Shakeout formation, it must have the following
attributes.

1. The stock must be in a strong up trend and trading above the Bullish Support
Line.
2. The stock must rise to a level where it forms two tops at the same price forming
a Double Top.
3. The subsequent reversal of the stock from these two tops must give a Double
Bottom sell signal.

Shakeout Pattern
Then the chart gives a Double Bottom sell signal.
First, this pattern is in a strong
up trend.

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Bearish Signal Reversed.

This pattern must have seven

columns to qualify. Each
column of X's must be lower
than the one before and each
column of O's must carry lower
than the one prior to it. Action
of this type indicates supply is
in control and getting stronger.
In this pattern we will see the
stock reverse up and quickly,
without a period of
accumulation, break a double
top. This reverses the series of
lower tops and often leads to a
strong move to the upside. The
action point with this chart is
the breakout. We wait for the
breakout because until it is
given supply is in control. We
do not see this pattern very
often but when we do its one of
the best.
Bullish Signal Reversed.

This pattern is the reverse of

the Bearish Signal Reversed.
This pattern shows seven
columns of rising bottoms and
rising tops. When the last top is
made in the seventh column,
the stock reverses and without
a period of distribution declines
to give the Double Bottom sell
signal reversing a series of
rising bottoms.

Long Tail Down.

To qualify for a Long Tail

Down, we like to see a stock
that has declined 20 boxes or
more with a reversal up. We
are not going to split hairs over
20 boxes down. In fact, we
start looking when a stock falls
18 O's down. What we are
looking for here is a trade. The
next three box reversal to the
upside often leads to a decent
bounce. When evaluating
these plays we want to find
stocks that have pulled back to

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an area of support and we

want the reversal to occur fairly
quickly. If the stock falls 20
boxes and sits there for 3
months then we wouldn't look
for much of a "Dead Cat
Bounce".

High Pole Warning

Formation.

This pattern is not actually a

sell signal. It occurs when a
chart exceeds a previous
column of X's by at least 3
boxes. Following the rise in X's,
the stock must pull back at
least 50 percent of that last
up-thrust on the chart. The
thought behind the formation is
that there must be something
wrong with the supply-demand
relationship if the stock
subsequently gave up 50
percent of the last move up. It's
a warning that supply might be
taking control of the stock.
In the example to the right the
stock rises above the previous
column of X's by four boxes
making the move 7 boxes in
total. A greater than 50%
retracement would be a
pullback of 4 boxes or a move

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to 19.

Next

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Welcome:
Lesson 4: Introduction

Now we will talk about the market. The PnF indicators In this section we will list
are our main tools for assessing risk in the market any upcoming live online
place. In this chapter all of the different indicators will classes specifically
be reviewed. In this section you will get answers to covering this chapter.
many investment questions. How does one determine
when risk is high or low? When do I lock in some Message Board
profits? What are some strategies for managing risk?
Can the market be timed? Is there a way to know? You
will be able to assess the risk in the market and how
best to take advantage or protect yourself accordingly.

Lesson 4 Contents:
Part 1: NYSE Bullish Percent Part 2: Bullish Percent Charts

Market Timing OTC Bullish Percent

Attributes of a Bullish Percent Chart Optionable Bullish Percent
NYSE Bullish Percent Risk Levels. 10 Week Moving Average
Historical NYSE BP Chart High Low Index
Dow Jones 20 Bond Average

Test yourself at the end of the chapter to sharpen your skills.

If you have any questions, please check the "Questions" section to see if it has
already been answered. If it has not, then click on the question mark icon below to
email us your question. It will be answered shortly (within two business days).

Next

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Welcome:
Lesson 4: Part 1. NYSE Bullish Percent

Technical Indicators
The Myth About Market Timing.
You have heard for years that market timing can't be done. The market averages a
return of about 12% a year and to try and do better is just a frugal attempt. The buy
and hold strategy is the best for long term investors. There's more to it than just
buy and hold as we will explain and you've probably come to realize on your own.
Best Days vs Worst Days.
Consider the following argument put forward by the Buy and Hold proponents.
If you missed the ten best days in the market from '90-'98, your returns would be
140% versus a buy and hold strategy of 248%. The other half of that story is if you
missed the ten worst days during that same period, your returns were 473%. Since
the best days and the worst days often happen near one another, we looked at
missing the 10 best and 10 worst days. Excluding those days your return was
261%!

Market Timing Does Work.

"In order to be a successful risk management investment strategy, market timing

does not have to be perfect. Despite belief to the contrary, market timing does not
target getting in and out of the market at the absolute bottoms or tops. It does,
however, strive to get an investor's funds out of the market before a major bear
market devastates the portfolio. Market timing's first and foremost priority is the
preservation of capital."

Source: "Lasting Wealth is a Matter of Timing" by Sosnowy

Do You Feel Lucky?

The assumption of the often quoted Buy and Hold studies is that you won't need
your money for 50 years or more. These studies assume you aren't buying a home,
sending children to college or retiring in the next 50 years. A more important
question is...
"Where are you getting on the investment train?"
If you got on the train at the beginning of the 1973-1974 Bear Market, it took 7.6
years to get back to even.
Do you have 7.6 years to spare? Do you not need your money for 7.6 years?

NYSE Bullish Percent:

We use the Bullish Percent indices to assess risk in the market.

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The concept began in the 1940's but it wasn't until 1955 that A.W. Cohen actually
created the NYSE Bullish Percent. We often refer to this indicator as our main
coach for NYSE stocks. It tells us whether to have the offensive or defensive team
on the field. X's mean offense and O's mean defense. This indicator tells you who
has the ball. Based on a University of Chicago study 80% of the risk in any stock is
based in the market and the sector. However, they found that most people spent
80% of their time on stock selection. The NYSE Bullish Percent provides the insight
needed in determining the risk in the market. The more you learn about this
indicator, the more confidence you will have in your day to day operations in the
market.

If the overall market is not supporting higher prices, very few stocks you own , if
any, will do well. In a football game, two sides operate on the field at any one time,
offense and defense. The same forces act in the marketplace. There are times
when the market is supporting higher prices. When the market is supporting higher
prices, we can say that you have possession of the ball. You have the offensive
team on the field. When you have the ball, your job is to take as much money away
from the market as possible; this is the time you must try to score. During times
when the market is not supporting higher prices, you have in essence lost the ball
and must put the defensive team on the field. During such periods, the job of the
market is to take as much money away from you as possible. Think for a moment
about your favorite football team. How would they do if they operated only with the
offensive team in every game? They might do well when they had possession of
the ball, but when the opposing team had the ball, your team would be scored on at
will. The net result is your season would be lackluster at best.
This is the problem most investors have: They don't know which team is on the
field, much less where the game is being played. The NYSE Bullish Percent clearly
signals when the environment is ripe for offense or defense.
The NYSE BP is simply a compilation of the percent of stocks that trade on the
NYSE on Point and Figure buy signals. If you simply thumbed through all the Point
and Figure chart patterns of the stocks on the NYSE and counted the ones that
were on buy signals, then divided by the total number of stocks evaluated, you
would have the NYSE Bullish Percent reading. DWA calculates all of this in their
database and displays the charts for you, however, it is important to know how they
are calculated.
Let's say for instance, there were 2,000 stocks on the NYSE and 1,000 of them
were on Point and Figure buy signals. The Bullish Percent would be at 50%
(1,000/2,000 = 50 percent). We use the same three-box reversal to shift columns in
this index as we do in the normal Point and Figure chart. Each box constitutes 2
percent, and the vertical axis runs from 0 to 100 percent. It will take a 6% change in
order to reverse this chart.
When the index is rising in a column of X's, more stocks are going on buy signals.
Changes in the index can only come from first signals that are given by a stock,
not subsequent signals. Let's say that XYZ stock bottoms out after declining and
then gives that first buy signal off the bottom. That signal turns the stock from
bearish to bullish. It is this first buy signal that is recorded. All subsequent buy
signals are not counted.

The Bullish Percent concept is unique from most market indicators because it is a
one stock - one vote indicator. The reason this is so important is that most peoples
portfolios are managed on an equal dollar weighted basis, much like a one stock -
one vote. Therefore, the Bullish Percent index is a better indicator to manage risk
than a capitalization weighted index like the S&P 500. In other words, you are

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getting an apples to apples comparison.

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Welcome:
Lesson 4: Part 1. Continued

Attributes of a Bullish Percent Chart:

These are the same as with any PnF chart. The letters or numbers in the columns
denote the months of the year. Time spent in a column of X's or O's is generally a
number of months, not weeks. There are no bullish or bearish resistance lines but
there are risk levels which we will go over in a moment.
It is important to know how this index works so let's go over how the index rises
and falls.
Example:
Let's say there are 100 stocks trading on the NYSE. Over the next week 12 stocks
experience a new buy signal and 10 stocks experience new sell signals. The net
result of the action for the week is two new buy signals or 2 percent more stocks
are on buy signals. Remember that each box on the chart represents 2 percent, so
a 2 percent net change in new buy signals allows the chart to rise one box.
The only way to switch from one column to the next is through a three-box
reversal. It would take a sum total of 6 percent net buy or sell signals to cause a
reversal. Remember the box sizes, in this case the box size is 2 percent and
therefore a three box is 6 percent, in either direction.
Reversing from one column to the next is tantamount to losing or gaining
possession of the ball.
We use the football analogy here a lot because it helps visualize how the NYSE
BP works. The "playing field" runs from 0 to 100 percent, kind of like a 100 yard
football field. Where you are on that field determines your "field" position. The
column you are in tells you if you have the footbal and the field position tells you
how much room you have to run.

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There are two things we try to ascertain with this chart:

1 - Who has the ball?
2 - What is the field position?

The higher the index climbs, the more overbought it becomes. The lower it drops,
the more oversold it gets. When the index is rising in a column of X's, we say you
have possession of the football. When you have possession, you must run offense
plays. This is your time to attempt to score against your opponent, the stock

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market. When the index is declining in a column of O's, we say the market has the
ball and your job is to try to keep it from scoring against you.

If you colored the chart above the 70 percent level red and the area below 30
percent level green, these would represent the two extremes much like the end
zones of a football field.
When you are in the Green Zone, below 30% and in a column of X'syou have a lot
of room to run the ball. When you are in the Red Zone and in a column of O's you
have a lot of territory to lose the ball. It isn't often the index moves below 30% or
above 70%.

Thinking about this concept in terms of supply and demand, when the NYSE
Bullish Percent goes near/below 30% the availability of supply to continue to push
the market lower is severely limited. When the NYSE BP goes near/above the 70%
level, the availability of demand to continue to push the market higher is severely
limited.

Next

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Welcome:
Lesson 4: Part 1. Continued

NYSE Bullish Percent Risk Levels.

There are six degrees of risk in bullish percent charts. These risk levels are similar
to the different signals a traffic light can give. While we pay the most attention to
whether the bullish percent index is in X's or O's and the field position, to become a
real craftsman at this methodology you need to be aware of the six different risk
levels.

1 - Bull Confirmed
2 - Bull Alert
3 - Bull Correction
4 - Bear Confirmed
5 - Bear Alert
6 - Bear Correction.

1) Bull Confirmed Market:

This risk level occurs when the
Bullish Percent gives a buy
signal by exceeding a previous
column of X's.

It is equally important to evaluate

the relative field position of the
index. Bull Confirmed at the 70
percent level is very different
from Bull Confirmed at the 30
percent level. Bull Confirmed at
70 percent means much more
risk than Bull Confirmed at 30
percent.

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2) Bull Alert Market Examples of Bull Alert:

This market occurs when the
Bullish Percent reverses up into
a column of X's from below 30
percent. This index does not
have to exceed the 30 percent
level, simply reverse up. At the
30 percent or lower level, many
stocks are making their lows.
The actual reversal to the upside
suggests most lows have been
made and the probability is up
from there. A change to this risk
level is tantamount to a red light
changing to green.

3) Bull Correction Market

The bull market is getting a little
extended at these levels, and the
market is currently digesting its
excesses. The bull trend is likely
to resume shortly. It is
characterized by a 6 percent
reversal down from a Bull
Confirmed status that takes
place below the 70 percent level.
The next reversal back up into a
column of X's reverts the risk
level back to Bull Confirmed.
Examples are below.
First... Then...

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4) Bear Confirmed Market:

This market is characterized by
the Bullish Percent Index
penetrating a previous bottom.
Again, field position is important
to consider in this risk level. Bear
Confirmed at 30% is not as
dangerous as Bear Confirmed at
70 percent. Always keep the field
position in mind. The traffic light
is red in this risk level. If Bear
Confirmed comes near 70% you
should employ defensive
strategies. If the Bear Confirmed
happens near 30%, watch
closely for the first three box
reversal back up to X's. See
example to the right.
5) Bear Alert Market
When the Bullish Percent drops
below 70 percent without
penetrating a previous bottom
Bear Alert status occurs.
Typically a reversal to Bear Alert
will bring this NYSE BP down to
at least the 50% level.
In the Bear Alert market,
defensive action should be
taken. Short positions can also
be initiated in technically weak
stocks. An example is to the
right.
6) Bear Correction Market.
This indicates a respite in the
selling pressure. This phase is
characterized by a 6 percent
reversal into a column of X's
from a Bear Confirmed status
above the 30 percent level.

Bull Confirmed Bull Alert Bull Correction Bear Confirmed Bear Alert Bear Correction.

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Next

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Welcome:
Lesson 4: Part 1. Continued

Risk Levels labeled in the NYSE Bullish Percent.

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Link to a historical Point and Figure Chart (database format)

We've talked a lot about using the NYSE Bullish Percent as a way to assess risk in the
market. Here are just some of the different ways one can play offense (wealth
accumulation) and defense (wealth preservation).

Offense: Defense:
Buy Stock Come off margin
Buy Calls Sell partial positions
Increase invested position. Tighten up stop loss points.
Sell calls against positions
Take partial positions off the table
Increase cash position
Move to more defensive issues
Buy protective puts
Short positions can be initiated

Next

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Welcome:
Lesson 4: Part 2. Bullish Percent Charts

OTC Bullish Percent

Many investors Chart of the OTC Bullish Percent with risk levels:
make the
mistake of trying
to follow too
many indicators.
The more you
follow, the more
confused you
will become.
Our most
important
concept is the
Bullish Percent
discussed in the
first part of this
Lesson. DWA
also follows an
OTC Bullish
Percent Index
because of the
plethora of
high-tech,
over-the-counter
stocks we deal
with each day.
The OTC Bullish
Percent Index is
a compilation of
the percentage
of
over-the-counter
stocks that are
on Point and
Figure buy
signals. The
chart is read the
same way as
the NYSE
Bullish Percent
Index. When the
index is rising in
a column of X's,
you have the
football.
Conversely,
when it is in a
column of O's,
the OTC market
has the ball.
The same two

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lines of
demarcation
exist at the 70%
and 30% level.
The risk levels
are defined the
same for the
OTC BP as with
the NYSE BP
and their
meaning is
identical.

Important Note:
You can see here with the above chart that it isn't often the Index reaches below the 30% level except in
extreme market conditions. It is more often that it bases around the higher 30's or lower 40's. This is also
true near the 70% level. Most often the OTC Bullish Percent tops out in the 60's. When learning the risk
levels you must understand, as with all of PnF charts, that this is an art, not a science. Point and Figure is a
combination of charts and so far we have been teaching you the principles of the individual charts and we
will start to move into how to put them all together.
Optionable Bullish Percent
The Optionable Bullish Percent is a shorter to intermediate term indicator comprised of bigger name/cap
stocks in the NYSE and OTC that have options listed against them. There are more than 3000 stocks in this
index.
It works just like the NYSE BP and often changes in the Optionable Bullish Percent will be followed by a
change in the NYSE Bullish Percent. That is to say if the "OPTI" turns negative we watch the NYSE BP
closely to see if it is to turn negative and vice versa. The same six risk levels apply and the overbought level
begins at 70% (Red Zone) and the oversold level begins at 30% (Green Zone).

Next

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Welcome:
Lesson 4: Part 2. Continued

10 Week Moving Average

Also known as the Percent of 10.
One of our main short term indicators. As the name implies, this is simply the percent of stocks on the
NYSE that are above their ten week moving averages. We also have a 10 Week for the OTC.
Buy signals occur when a column of O's fall at or below 30% and then reverse to a column of X's.
Buy signals can also occur when a column of X's exceeds a previous column of X's.
Sell signals occur when the index goes above 70% and then reverses down below 70% or when a column
of O's exceeds a previous column of O's.
Being aware of the short term picture is important because often it will spill over into the long term picture.

We use this
short term
indicator with
the High-Low
index and we
like to see
them moving
in concert
with one
another.
The 10 Week
moves a lot
quicker than
the NYSE
BP, the OTC
or the
Optionable
BP because it
is a short
term
indicator.
This index is
of great
benefit when
you are
planning your
trade.
Investors
should never
us the 10
Week Moving
Average
Index as their
sole indicator
in
determining
whether to
make new

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stock
commitments.
However,
traders can
effectively
use it as a
market timing
indicator for
short term
trades. If the
main trend in
the market is
up as
dictated by
the NYSE BP
and the 10
Week is on a
buy signal,
then you are
in a market
that is bull
configured
both short
and long
term. In the
latter case,
an investor
would be fully
invested. We
will continue
with how to
put this
together with
other indexes
in a later
lesson.

High Low Index

One of the short term indicators, we use this in conjunction with the Percent of 10.
This index is calculated by taking the number of new highs and dividing by the number of new highs plus
new lows. We keep this calculation on a ten day moving average and then plot it on a point and figure
chart.
Buy signals come when the index falls to or below 30% and then reverses up, or a column of X's exceeds
a previous column of X's.
Sell signals come when the index goes above 70% and then reverses down below 70% or a column of
O's exceeds a previous column of O's,

The chart is set

just like a bullish
percent chart
going from 0 to
100%. The two
critical levels are
30 and 70%. Sell
signals come from
reversals above to
below 70%. Buy
and sell signals
can also come by
exceeding a
previous top or
bottom
respectively.
Reversals from
above 70 percent

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suggest that there
is a trend change
from more stocks
making new highs
to more stocks
making new lows.

The percent of 10
and the High Low
typically go in
tandem but not
always.
Sometimes one
lags the other.
Nothing is ever
exact in the
markets. These
two indicators are
our main short
term guides.

More on the NYSE High Low Index

(Excerpt from 10/01/99 Daily Equity Report)
Below is a table showing times when the NYSE High Low Index hit 10% and the subsequent reversal up.
As you can see, reversals up from below the 10% level have been very good signs to re-enter the market
with new positions.
Moved Dow Low Dow Upside Dow
Date
Below 10% Reading Reading Reading Reversal Reading
Mar 1980 3-6-80 828.07 0.9% 800.94 4-10-80 791.47
Sep 1981 8-31-81 881.46 2.0% 849.98 10-7-81 868.72
Jun 1982 6-7-82 804.03 5.5% 795.57 6-24-82 810.41
Feb 1984 2-17-84 1148.87 7.5% 1134.21 2-28-84 1157.14
May 1984 2-17-84 1101.24 5.3% 1124.35 6-11-84 1115.61
Jul 1984 7-18-84 1111.64 5.5% 1096.95 8-2-84 1166.08
Oct 1987 10-20-87 1841.01 0.7% 1938.33 1-4-88 2015.25
Jan 1990 1-31-90 2590.54 8.9% 2590.54 2-7-90 2640.09
May 1990 5-2-90 2689.64 9.7% 2689.64 5-7-90 2721.62

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Aug 1990 8-15-90 2748.27 3.4% 2613.37 9-18-90 2571.29

Nov 1994 11-23-94 3674.63 5.4% 3746.29 12-21-94 3801.80
Aug 1998 8-31-98 7539.07 4.2% 7615.54 9-23-98 8154.41

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Welcome:
Lesson 4: Part 2. Continued

Dow Jones 20 Bond Average:

This is our primary bond indicator. The Dow Jones 20 Bond Average is comprised
of 10 industrial and 10 public utility bonds traded on the New York Exchange. The
closing price of the Dow Jones 20 Bond Average is simply plotted on a Point and
Figure chart. The box size is .20 per box. The average moves slowly and does not
often give signals, but when they occur, you must pay close attention.
Moves on this chart are typically long term and we look at buy and sell signals as
well as high pole and low pole warnings.
In October 1993 and in February of 1999, the Dow Jones 20 Bond Average gave a
sell signal at high levels which suggested higher interest rates to come. This in both
cases this indicator was dead on the money. We reported in our Daily Equity
Market Report to lock in interest rates on adjustable mortgages.
The rules for a High Pole and Low Pole warning apply here. A low pole warning
occurs when the chart exceeds the previous bottom by at least three O's and then
reverses back to the upside and retraces the previous down move by greater than
50%. This is considered a buy signal. The high pole warning occurs when the chart
exceeds the previous top by at least three X's and then pulls back retracing more
that 50% of the upmove. This is a sell signal.

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Buy and Sell Signals for the Dow Jones 20 Bond Average:

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May 1992: Buy Signal 99.2 Change:

October 1993: Sell Signal 105.6 +6.4
October 1993: Sell Signal 105.6 Change:
January 1995: Buy Signal 94.6 +11.0
January 1995 Buy Signal 94.6 Change:
July 1995: Sell Signal 102.8 +8.2
July 1995: Sell Signal 102.8 Change:
September 1995: Buy Signal 103.0 -0.2
September 1995: Buy Signal 103.0 Change:
March 1996: Sell Signal 103.8 +0.8
March 1996: Sell Signal 103.8 Change:
August 1996: Buy Signal 102.0 +1.8
August 1996: Buy Signal 102.0 Change:
January 1997: Sell Signal 103.0 +1.0
January 1997: Sell Signal 103.0 Change:
June 1997: Buy Signal 102.6 +0.4
June 1997: Buy Signal 102.6 Change:
February 1999 Sell Signal 106.0 +3.5
February 1999: Sell Signal 106.0 Change:
February 2000 Buy Signal 96.4 +9.6
February 2000 Buy Signal 96.4 Change:
March 2000 Sell Signal 95.6 -.8.0
March 2000 Sell Signal 95.6 Change:
June 2000 Buy Signal 94.6 + 1.0

Next

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Welcome:
Lesson 4: Wrap Up

In this chapter you have been introduced with all of the main indicators; the NYSE
BP, the Optionable BP, the OTC BP, Percent of 10, High Low Index and the Dow
Jones 20 Bond average. The NYSE BP and OTC BP are our Main Coachs, our
guide to whether we are offensive or defensive in the market. They look ahead and
are the first thing we consider when investing. The short term indicators determine
our trade positioning, whether to cover or initiate new positions.
In a later chapter you will see how all of these work together to determine long term
and short term risk and how to position yourself in these different types of markets.
Lesson 4 Contents:
Part 1: NYSE Bullish Percent Part 2: Bullish Percent Charts

Market Timing OTC Bullish Percent

Attributes of a Bullish Percent Chart Optionable Bullish Percent
NYSE Bullish Percent Risk Levels. 10 Week Moving Average
Historical NYSE BP Chart High Low Index
Dow Jones 20 Bond Average

We will now test you to find your comprehension of the subjects discussed in
Lesson 4.

Next

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Welcome:
Lesson 4: Part 1. NYSE Bullish Percent

Technical Indicators
The Myth About Market Timing.
You have heard for years that market timing can't be done. The market averages a
return of about 12% a year and to try and do better is just a frugal attempt. The buy
and hold strategy is the best for long term investors. There's more to it than just
buy and hold as we will explain and you've probably come to realize on your own.
Best Days vs Worst Days.
Consider the following argument put forward by the Buy and Hold proponents.
If you missed the ten best days in the market from '90-'98, your returns would be
140% versus a buy and hold strategy of 248%. The other half of that story is if you
missed the ten worst days during that same period, your returns were 473%. Since
the best days and the worst days often happen near one another, we looked at
missing the 10 best and 10 worst days. Excluding those days your return was
261%!

Market Timing Does Work.

"In order to be a successful risk management investment strategy, market timing

does not have to be perfect. Despite belief to the contrary, market timing does not
target getting in and out of the market at the absolute bottoms or tops. It does,
however, strive to get an investor's funds out of the market before a major bear
market devastates the portfolio. Market timing's first and foremost priority is the
preservation of capital."

Source: "Lasting Wealth is a Matter of Timing" by Sosnowy

Do You Feel Lucky?

The assumption of the often quoted Buy and Hold studies is that you won't need
your money for 50 years or more. These studies assume you aren't buying a home,
sending children to college or retiring in the next 50 years. A more important
question is...
"Where are you getting on the investment train?"
If you got on the train at the beginning of the 1973-1974 Bear Market, it took 7.6
years to get back to even.
Do you have 7.6 years to spare? Do you not need your money for 7.6 years?

NYSE Bullish Percent:

We use the Bullish Percent indices to assess risk in the market.

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The concept began in the 1940's but it wasn't until 1955 that A.W. Cohen actually
created the NYSE Bullish Percent. We often refer to this indicator as our main
coach for NYSE stocks. It tells us whether to have the offensive or defensive team
on the field. X's mean offense and O's mean defense. This indicator tells you who
has the ball. Based on a University of Chicago study 80% of the risk in any stock is
based in the market and the sector. However, they found that most people spent
80% of their time on stock selection. The NYSE Bullish Percent provides the insight
needed in determining the risk in the market. The more you learn about this
indicator, the more confidence you will have in your day to day operations in the
market.

If the overall market is not supporting higher prices, very few stocks you own , if
any, will do well. In a football game, two sides operate on the field at any one time,
offense and defense. The same forces act in the marketplace. There are times
when the market is supporting higher prices. When the market is supporting higher
prices, we can say that you have possession of the ball. You have the offensive
team on the field. When you have the ball, your job is to take as much money away
from the market as possible; this is the time you must try to score. During times
when the market is not supporting higher prices, you have in essence lost the ball
and must put the defensive team on the field. During such periods, the job of the
market is to take as much money away from you as possible. Think for a moment
about your favorite football team. How would they do if they operated only with the
offensive team in every game? They might do well when they had possession of
the ball, but when the opposing team had the ball, your team would be scored on at
will. The net result is your season would be lackluster at best.
This is the problem most investors have: They don't know which team is on the
field, much less where the game is being played. The NYSE Bullish Percent clearly
signals when the environment is ripe for offense or defense.
The NYSE BP is simply a compilation of the percent of stocks that trade on the
NYSE on Point and Figure buy signals. If you simply thumbed through all the Point
and Figure chart patterns of the stocks on the NYSE and counted the ones that
were on buy signals, then divided by the total number of stocks evaluated, you
would have the NYSE Bullish Percent reading. DWA calculates all of this in their
database and displays the charts for you, however, it is important to know how they
are calculated.
Let's say for instance, there were 2,000 stocks on the NYSE and 1,000 of them
were on Point and Figure buy signals. The Bullish Percent would be at 50%
(1,000/2,000 = 50 percent). We use the same three-box reversal to shift columns in
this index as we do in the normal Point and Figure chart. Each box constitutes 2
percent, and the vertical axis runs from 0 to 100 percent. It will take a 6% change in
order to reverse this chart.
When the index is rising in a column of X's, more stocks are going on buy signals.
Changes in the index can only come from first signals that are given by a stock,
not subsequent signals. Let's say that XYZ stock bottoms out after declining and
then gives that first buy signal off the bottom. That signal turns the stock from
bearish to bullish. It is this first buy signal that is recorded. All subsequent buy
signals are not counted.

The Bullish Percent concept is unique from most market indicators because it is a
one stock - one vote indicator. The reason this is so important is that most peoples
portfolios are managed on an equal dollar weighted basis, much like a one stock -
one vote. Therefore, the Bullish Percent index is a better indicator to manage risk
than a capitalization weighted index like the S&P 500. In other words, you are

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getting an apples to apples comparison.

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Welcome:
Lesson 5: Introduction

We've covered the overall market with the Bullish Percents In this section we will list any
and now we look at the individual sectors that are comprised upcoming live online classes
of the securities. As with the market, it is important to specifically covering this
understand all of the risk under which a particular stock is chapter.
operating. Here we discuss how the sectors operate, how to
evaluate them and how they are performing compared to the Message Board
market.

Lesson 5 Contents:
Part 1: Sector Bullish Percents. Part 2: Sector Relative Strength

Perfect Market Timing vs Perfect Sector Timing Sector Relative Strength

DWA Individual Sectors. Intel Example
Sector Bell Curves Sector (Index) RS Chart
Examples DWA Sector Index RS Charts

Test yourself at the end of the chapter to sharpen your skills.

If you have any questions, please check the "Questions" section to see if it has already been
answered. If it has not, then click on the question mark icon below to email us your question.
It will be answered shortly (within two business days).

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PnF University

Welcome:
Lesson 5: Part 1 - Sector Bullish Percents.

Perfect Market Timing vs Perfect Sector Timing.

Buy & Hold: Bought the S&P 500 and held through the good times and the bad
times.
Market Took money out of the S&P before there was a down month and put
Timing: it back in just before a positive month.

Sector Bought the best performing sector at the beginning of the year.
Timing:

Sector analysis is one of the most Watch magazine covers carefully. The
important yet least analyzed parts of the next time you are in the airport look at
market. We place tremendous the magazine rack and see if you can
emphasis on sector rotation in our daily find a widely read magazine that makes
work. Probably 80 percent of the risk in a major statement on its cover about
a stock is the market and sector. Stock some sector of the market - something
prices do not move without rhyme or like "The Banking Industry Is Dead". If
reason. These moves tend to be you find one, buy the magazine and
orchestrated. keep it. Normally, the trend in that
sector will continue to move for a couple
A good analogy would be the picture of of months in the direction the cover
wildebeest romping across the African describes. Give that sector 8 months,
plains, moving in unison first in one and you will find its behavior is the
direction and then another, but the exact opposite of that suggested on the
majority go together. Sectors operate magazine cover. The reason for this is
the same way. Wall Street tends to that the cover stirs Mr. Jones and Ms.
follow the herd. First one analyst raises Smith into action and while all the Jones
the earnings expectation, then the rest and Smiths are busy reacting, the
follow and before you know it, the sector moves in the forecasted
sector is in play. direction. Once these investors are in
and the door slams behind them, there
As the sector moves up, other is no more buying or selling pressure
institutions see the move and climb on (whichever the cover suggests) left to
board. Eventually the mainstream sponsor the sector. The forces of supply
financial periodicals catch wind of a and demand begin to change, and the
major move underway and begin to sector takes the opposite track.
write articles about how the industry has
made a turnaround and should have You must remember, to be successful
clear sailing ahead. This draws in the stock market you must look
investors in just in time to catch the top.

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By the time the articles appear in ahead: What is happening in the market
magazines about how great the industry today has already been discounted
is, almost everyone is in that wants to many months ago. When evaluating
be in. The last group is the sectors you must be a contrarian. You
unsuspecting public, who use must find the courage to buy stocks in
newspapers and magazines as their sectors that are our of favor. You must
primary source of stock market avoid the crowd, go the opposite
research. direction. This is extremely difficult as it
goes against human nature.
Remember that prices move as a direct
result of supply-and-demand Sector rotation is one of the most
imbalances. If there are no more buyers important parts of our daily operation.
left to cast their vote, supply by We follow 43 sector Bullish Percent
definition must take the upper hand. Charts. The same principles used with
The sector then begins to lose the market bullish percent charts
Sponsorship, and the whole process applies to the Sector Bullish percents.
begins again only in reverse this time. The same 30% and 70% levels apply to
sectors as well as the six different risk
levels. Ideally, each sector bullish
percent should have at least 100 stocks
in it. You will also notice that some
sectors tend to move to greater
extremes than the NYSE Bullish
Percent.

Individual sectors.
Here are the sectors currently covered at DWA:
This list is pulled from the DWA database.
Aerospace Airline Forest Prods/Paper Restaurants
Asia Pacific Gaming Retailing
Autos & Parts Healthcare Savings & Loans
Banks Household Goods Semiconductors
Biomedics/Genetics Insurance Software
Building Internet Steel/Iron
Business Products Latin America Telephone
Chemicals Leisure Textiles / Apparel
Computers Machinery and Tools Transports / Non Air Bull Alert
Drugs Metals Non Ferrous Utilities / Electri
Electronics Oil Utilities / Gas
Europe Oil Service Wall Street
Finance Precious Metals Waste Management
Foods Beverages/Soap Protection Safety Eq
Real Estate

We will not review each sector bullish percent chart one by one, however, it is
important that you take the time to look at them. By evaluating each of these charts
you will learn the nuances of each sector. Again this is the "art" of the methodology.
Some like the internet have wild swings to chart extremes while others like the drug
sector seem to move in a more confined area. Understanding this, knowing where
a sector typically tops or bottoms, helps you to better evaluate the risk in a

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particular sector.

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Welcome:
Lesson 5: Part 1 - Continued

Sector Bell Curves:

The tables below are used to help us depict the overbought or oversold nature of the sector bullish percent
charts. The horizontal scale runs from less than 10%(oversold) to greater than 90% (overbought). We simply
place the sector symbol above the point on the horizontal scale which correlates to its bullish percent chart. If
a sector is on the far right side it is overbought and if it is on the far left side it is oversold. Below are some
"time shots" of these curves.
Dow Industrials in the 2350 area and making all-time highs

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It is when the Bell curve is skewed to the right that everyone who wants to be in the market is in and there
isn't much opportunity left. This is when things look the best but really it is when caution is warranted.

The charts above show all the sectors in Uppercase letters. DWA created this method to easily show which
sectors are moving up or down, are in X's or O's; Uppercase for those sectors moving up and Lowercase for
sectors moving down (not shown in the Bell curves above).

You can look up the sector Bell Curve if you have the professional subscription at DWA under the "Reports
and Sector Area" link. For the individual investors, DWA posts the Sector Bell curve in the "From the Analyst"
section when there are important changes or updates.

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Welcome:
Lesson 5: Part 1 - Continued

Let's look at a few charts to give the example.

Internet Sector
(BPINET)

Notice the large swings

in this sector from
above 80% to below
20%. This particular
sector covers the whole
field. This action is not
typical of the sector
bullish percents. This is
why it is imparative that
you evaluate and "get a
feel" for each of these
charts. Or at least the
ones you are interested
in.

Note:
With respect to the Bell
Curve, this sector would
be listed on the left
hand side, below the
30% level and in lower
case (because the
sector chart is in O's).

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Drug Sector
(BPDRUG)

Notice this sector

typically moves
between the high 30's
and mid 60's. It has in
its history moved below
30%, which proved to
be a great entry. Only in
the years '91 and '92 did
it move above 70% (not
pictured). Therefore, we
consider the "over
bought" area for this
particular sector to be in
the 60's and the low
30's would be
considered the "over
sold" area.
Note:

With respect to the Bell

Curve, this chart would
be in the middle of the
curve, at 50%, and in
Uppercase letters
because the chart is in
X's.

Take time to look at the different sectors to see where they top and bottom out and where opportunity lies. At
this writing, the market has taken a major slide and the Sector Bell Curve has been effected. Most of the
sectors are below the 50% area telling us that the market is now over sold. We look for sectors to reverse up
from these low levels and to find opportunity in stocks that are housed in those sectors. You will see the
Uppercase and Lowercase letters in this example.

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Next

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Welcome:
Lesson 5: Part 2 - Sector Relative Strength

Sector Relative Strength is a great tool to use when trying to determine which
sectors are outperforming the market. Given the fact that the Sector is one of the
greatest contributors to price fluctuation in a stock, it is extremely important to
determine its relative strength. Those sectors exhibiting positive relative strength
(ones in a column of X's on their RS chart) are the ones to focus on.
Relative Strength is a term we use extensively and place great importance. Many
of you are very aware of its definition and importance pertaining to stock selection,
but sector relative strength is a vital component when determining which sectors
are likely to perform the best. During times of market uncertainty, Sector RS takes
on a particularly significant role. It is at these times that you should be paying close
attention to those sectors which are exhibiting strong relative strength - that is, are
showing that they are "out performing" the market.
Sector Relative Strength measures how a particular sector is doing compared to
the market in general. The Relative Strength calculation is simply done (using
Tuesday evening closing data that is available automatically through DWA) by
dividing the price of the sector by the price of the S&P 500 (SPX), and then
multiplying by 100.

This number is then plotted on a point and figure chart. As with any PnF chart and
as you have seen in the previous lesson on stock relative strength, buy signals are
given when a column of X's exceeds a previous column of X's. Sell signals are
given when a column of O's exceeds a previous column of O's.
But of equal importance for Sector RS is what the most recent column is on the RS
chart.
When a sector index reverses up into a column of X's on its RS chart, we
consider that a "Buy" signal.

When a reversal up occurs, it is a sign that you should be considering it to initiate

positions. Don't forget that there are other factors to consider such as risk in the
general market and the chart of the individual stock. A reversal down on the sector
RS chart is considered a negative and this would not be a sector to consider
intiating positions in. If long stocks in these sectors it is time to evaluate them and

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make sure that appropriate stop loss points are in place.

The Nuances of Navigating this market.
Using the sector RS.

At DWA we constantly strive to present you with quality advice and research. We
are always working to become better at using our time-tested market and sector
indicators, and are continuously striving to develop new tools to help us navigate
the market, and therefore advise you accordingly. But just as important as our
development, is your development with using the tools we give you. This is where
education comes into play. We also wanted to alert you to all the different tools we
have developed to help determine which are the best sectors on a relative strength
basis. Below we discuss the basic concepts of sector relative strength and how it is
calculated. Then we highlight the different tools available to you on the DWA
Internet site that can help identify a sector's relative strength compared to the
overall market.
Sector Relative Strength is a great tool to use when trying to determine which
sectors are outperforming the market. Given the fact that the Sector is one of the
greatest contributor to price fluctuation in a stock, it is extremely important to
determine the relative strength. Those sectors exhibiting positive relative strength
(ones in a column of X's on their RS chart) are the ones to focus on.

Next

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Welcome:
Lesson 5: Part 2 - Continued

The sectors which we follow RS readings for are listed below. You can access this data
on the DWA site by clicking on the "Indices" link in the bottom-left quadrant. Then click
on the "Sector" link at the top of the page and this will bring up the list of sectors and
will show a column that says "RS vs. SPX". On this same page will be a list of our DWA
Equal Weighted Sector Index Relative Strength readings. We developed these DWA
indexes, (and RS charts for them), to give you a broader view of how a sector is
performing on a relative strength basis. The RS charts for the cap-weighted SOX and
the DWA Semiconductor index will more often than not tell the same story, but these
DWA Sector RS charts will be especially helpful for those sectors which don't have an
exchanged based sector index, such as the Media group, or Restaurant sector.

Again when using these RS charts, you want to focus your buying (or owning of stocks)
in those sectors which are in a column of X's on their RS chart - they are the ones
which are outperforming the market. This tool is extremely important to use when the
sector bullish percent may be close to a reversal down. It will help keep you in at least
partial positions of stocks that reside in strong RS sectors, rather than dumping the
whole position out if the sector bullish percent reverses down into O's.

Let's use Intel (INTC) as an example. The Semiconductor bullish percent reversed
down from high levels, but the relative strength for the sector has not waned at all. On
all measurements, the RS for the Semiconductor group remains very strong. So if you
owned INTC, instead of selling out the entire position, you would have been better off
to only trim the position, keeping some exposure in the group due to the strong RS
reading of the sector. Again, remember the concept is to outperform, and we think the
best measurement for this is RS.

Now let's go over some of the other tools that are at your disposal that can help you try
to get a handle on sector relative strength. There are two other forms of charts we keep
that can give you insight into sector relative strength, or the underlying strength of the
stocks which make up a given sector.

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We have developed a Percent OTC stocks whose RS is in X'S (RSXOTC )

chart that will show you
the percent of stocks in 58 | | |
a given sector, or for
that matter given market 56 | | |
class - NYSE, 54 | | |
Optionable Universe or 52 | | 3
OTC, which are in a 50 ------------+-+---X O---
column of X's on their
RS charts. We plot this
48 X | | X O
percent like we do our 46 X O | 2 O
other bullish percents, 44 A O | 1 O
from 0% to 100% using 42 X C | X O
a 6% reversal to change 40 ------------O +---C O---
columns. To the right we
show you one of these 38 5 | B 4 7
charts on the OTC 36 6 | A O X
market. This chart 34 8 X 9 O 6
shows you the percent 32 O 1 O 7 O X
of OTC stocks which are
in a column of X's on 30 ------------9 C O X O-X-
their RS charts. You can 28 O X 4 X O
see the weakness in 26 A X O |
March and April wit the 24 O | |
percent od stocks in this
universe falling from
22 | | |
52% to a low of 28%. 20 ------------+-+---+--------
18 | | |
16 | | |

Look at the RSXNYSE Percent of NYSE stocks whose RS is in X's (RSXNYSE)

chart (those stocks on
the NYSE which are in 48 | |
X's on their RS charts).
At the time the OTC 46 | |
RSX chart was 44 | |
reversing down this 42 B |
chart reversed up. A 40 ----------X O ------
clear sign of the
divergence we saw in
38 A O
these to markets after 36 X 5
the first quarter of 2000. 34 | 6
32 | 7 X
30 ----------+-8 6-----
28 | 9 5
26 | O 3
24 | A X
22 | 3 X
20 ----------+-4-----
18 | |
16 | |

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14 | |
12 | |

We take it a step further Percent of stocks on an RS buy signal.

and keep a chart that Using the Semiconductor Index (RSPSEMI)
shows the percent of
stocks in a given group 60 ------------+-----
that are on an RS buy
signal. These charts we 58 |
denote with RSP then 56 | 1
the first four letters, such 54 | X
as RSPSEMI or 52 A | C
RSPOTC. Both of these
indicators are longer
50 ----------X O X ----
term however, this 48 9 O B
indicator takes longer to 46 X C X
develop. The RSX tool 44 X O A
will be a bit more 42 X O X
"responsive" or "active",
while the RSP will be a 40 ----------8 O 9 -----
little slower because the 38 X 1 7
RSP chart is the percent 36 O X
of stocks on an RS buy 34 3 X
signal, and as you know
it takes longer to give an 32 O 6
RS signal change, than 30 ------------O 2 -----
to just reverse up or 28 6 1
down on stocks' RS 26 O X
chart. The RSX and
RSP charts can be
24 O C
found under the link 22 O X
entitled "DWA Technical 20 ------------7 X -----
Indicator Report" in the 18 9 |
bottom-left quadrant. At 16 | |
the top of the page that
comes up, you can click
on either "RS Pos" or
"RS Col X" to access
the list, or you can
specifically pull the chart
up by using RSX or RSP
then the first four letters.

Now this all may sound

a bit confusing, but
stand back and take
some time to look
through these charts
using the database site.
You will be amazed the
story they tell you. In
time you will become
adept at evaluating
them, and this will aid
you in determining

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sector relative strength.

Remember, all you can
do is stack as many
odds in your favor as
possible, use the tools
correctly, then make a
decision. It doesn't
guarantee you will get
the outcome you always
want or expect, but over
time you will be a
winner. The bottom line,
do not ignore sector
relative strength - it is
one of the most
important tools at your
disposal.

Different Sector Relative Strength Tools:

1. Sector (Index) Relative Strength Chart
2. DWA Sector Index (Equal Weighted) RS Charts
1) Sector Index Relative 2) DWA Sector Index (Equal
Strength Readings Weighted) RS Charts.

Symbol Index Symbol Sector Index

AUX Cboe Automotive Index DWAAERO DWA Aerospace Index
BIX S & P Banking Index DWAAUTO DWA Auto Index
BKX PHLX Bank Sector DWABANK Dorsey Wright Bank Index
BMX PHLX Computer Box Maker DWABIOM Dorsey Wright Biomedics
BTK Amex Biotechnology DWABUIL Dorsey Wright Building
CEX S & P Chemical Index DWABUSI Dorsey Wright Business
CWX Cboe Computer SFTWR DWACHEM Dorsey Wright Chemical
DOT PHLX the Street.Com Net In DWACOMP Dorsey Wright Computer
DRG Amex Drug Index DWADRUG Dorsey Wright Drug Index
DUX Dow Jones Utility Average DWAELEC Dorsey Wright Electronics
FPP PHLX Forest & Paper Produc DWAEUTI Dorsey Wright Electric Util
GAX Cboe Gaming Index DWAFINA Dorsey Wright Financial
GOX Goldlinx Intl Inc DWAFOOD Dorsey Wright Food Index
HCX S & P Healthcare DWAFORE Dorsey Wright Forest Prod
HMO Amex M.S. Healthcare Servi DWAGAME Dorsey Wright Gaming Index
HUI Amex Gold Bugs Index DWAGUTI Dorsey Wright Gas Utility
HWI Computer Hardware Index DWAHEAL Dorsey Wright Healthcare
IIX Inter@ctive Week Index DWAHOUS Dorsey Wright Household Goods
INX Cboe Internet Index DWAINET Dorsey Wright Internet
IUX S & P Insurance DWAINSU Dorsey Wright Insurance
MSH Morgan Stanley High Tech 3 DWALATI Dorsey Wright Latin America
NWX NWX - Amex Networking Indx DWALEIS Dorsey Wright Leisure
OIX Cboe Oil Index DWAMACH Dorsey Wright Machine
OSX PHLX Oil Service Sector DWAMEDI Dorsey Wright Media Index
PSE Pse High Tech Index DWAMETA Dorsey Wright Non Ferr Metals
RLX S & P Retail Index DWAOIL Dorsey Wright Oil Index
RMS Amex M.S. Reit DWAOILS Dorsey Wright Oil Service
RXH Amex M.S. Healthcare Hosp DWAPREC Dorsey Wright Precious Metal
SOX PHLX Semiconductor DWAPROT Dorsey Wright Protect/Safety
TRAN Dow Jones Trans Avg DWAREAL Dorsey Wright Real Estate
TRX S & P Transportation Index DWAREST Dorsey Wright Restaurant

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TXX Cboe Technology Index DWARETA Dorsey Wright Retail Index

UTIL Dow Jones Utility Avg DWASAVI Dorsey Wright Saving & Loan
UTY PHLX Utility Sector DWASEMI Dorsey Wright Semiconductor
XAL Amex Airlines Index DWASOFT Dorsey Wright Software Ind
XAU PHLX Gold & Silver Index DWASTEE Dorsey Wright Steel Index
XBD Amex Broker Dealer DWATELE Dorsey Wright Telephone
XCI Amex Computer Index DWATEXT Dorsey Wright Textile Index
XNG Amex Natural Gas DWATRAN Dorsey Wright Transport N/A
XOI Amex Oil Index DWAWALL Dorsey Wright Wall Street
XTC Amex Telecom DWAWAST Dorsey Wright Waste Index

Next

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Welcome:
Lesson 5: Wrap Up

Sector rotation is a very important aspect to investing because it unveils opportunity in the
market which is usually unrecognized until it is too late. Often the media "hypes" a particular
sector when it is already over bought and at its peak. PnF allows you to recognize
opportunity when it is the hardest to spot.
Part 1: Sector Bullish Percents. Part 2: Sector Relative Strength

Perfect Market Timing vs Perfect Sector Timing Sector Relative Strength

DWA Individual Sectors. Intel Example
Sector Bell Curves Sector (Index) RS Chart
Examples DWA Sector Index RS Charts

We will now test you to find your comprehension of the subjects discussed in Lesson 5.

Next

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PnF University

Testing for Lesson 5

1) Match the Risk levels with the description and chart.

Bull Confirmed Market Bear Confirmed Market

Bull Alert Market Bear Alert Market

Bull Correction Market Bear Correction Market

1: 2: 3: 4: 5: 6:
30 O 78 50 58 60 X 70
28 O 76 X 48 X 56 58 X O 68 X
26 O 74 X O 44 X X 54 X 56 X O X 66 X O
24 O X 72 X O 42 X O X 52 X X O 54 X O X O 64 X O
22 O X 70 X O 40 X O X 50 X O X O 52 X O X O 62 X O
20 O X 68 X O 39 X O 48 X O X O 50 X O O 60 X
18 O 66 X 38 X 46 X O O 48 X O 58 X X
16 64 X 37 X 44 X O 46 X 56 X O X
62 36 X 42 X O 44 54 X O X
60 35 40 X O 42 52 X O X
34 38 X O X 50 X O
36 X O X
34 X O X
32 X O
30 X

2) Here is a chart of the Aerospace Airlines sector. At this point what would you do with the stocks in your
portfolio that belong to this sector?
80 X ----------+-------------+----------
78 X O | |
76 X O | |
74 3 4 | X | X
72 X 5 | 9 O | 4 O
70 X O X ------+-------X O --+-----X O
68 X O X O | X A | X O
66 X O X O | 7 O | X
64 X O X 6 | X O | 3
62 X O O | X O X | X
60 2 ----7 ----+-------X O X O ----X
58 X O X X O X O X
56 X O X B O X 6 O X O X
54 O 9 O X O 3 O X O C O X X
52 O X O X 1 X O 5 B X O 1 O X
50 ------O X A +-O X 4 X O X O X O 2
48 O X | O O X O O X O X
46 O X | O O O X
44 O X | | O
42 O 8 | |
40 ------O X --+-------------+-------
38 O X | |
36 O | |
34 | |
32 | |
Buy as many good fundamental stocks as you can.

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PnF University

Boycott the airline industry and vow to take trains and boats for the rest of your life.
Evaluate your stocks for weak issues that may be in trouble and either sell or hedge them.
Wait for a reversal up to buy more stock.

3) Same sector. What would you do with stocks in this sector here?
80 --------------+-------------+------------
78 | |
76 | |
74 X | |
72 4 O | |
70 ----X O ------+-------------+------------
68 X O | |
66 X O | |
64 3 5 | X |
62 X O | X X O |
60 ----X O ------+-X O 5 O ----+------------
58 X O C | X O X O |
56 X O X O X 2 X O | X
54 X X 6 X O X O X O X | X O
52 1 O X O X O X O X 6 X O | X O
50 X O 2 O ----X O X O X O X O +---X 4 -----
48 X O X O X O 1 O X O O | X O
46 O X O X O X 3 4 O X X O
44 O 7 B O X O X 8 1 O X O
42 O X O O X O X O X O
40 -------O ----X +---O ------O X O 3 O -----
38 O X | 9 C 2 X O
36 8 X | O X O X O
34 O X | O X O
32 O X | O B
30 -------O ----X +-----------O X -----------
28 O X | O X
26 O X | O |
24 O X X | |
22 O X O X | |
20 -------O X O X +-------------+------------
18 O X A X | |
16 9 X O | |
Liquidate all issues because a sell signal is coming up.
Wait for the sector to move below 30% to find the really good deals.
Still vowing never to fly again.
Consider buying strong stocks in this sector.

4) Answer the following questions with regard to this Bell Curve:

wast
TRAN
TEXT
reta
REAL
mach
wall leis
stee prot lati
semi meta fina
tele SAVI heal busi oils
inet prec EUTI BUIL rest hous GUTI
comp SOFT drug elec asia insu FOOD GAME
biom medi BANK auto aero fore euro CHEM oil
0-14% 16-20% 22-26% 28-32% 34-36% 38-42% 44-46% 48-52% 54-56% 58-62% ...
a. Looking at this Bell Curve, the market is:
Normal Oversold Over bought
b. Will this Bell Curve move more to the right or to the left from here?
Right Left Can't tell

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c. The sectors in this Bell Curve are predominantly:

In X's In O's
d. Looking at the Drug sector (drug) on this Bell Curve, would you consider buying stocks in this sector?
Yes, drug stocks have been slammed by the media so it has to be time to buy.
No, it isn't below 20% yet.
Yes, the sector is in X's below 30% - you can buy stocks, whether weak or strong.
Not yet, the sector is still in O's and has not reversed up yet.
I'd have to see the actual chart to see where it normally resides.
Sector Relative Strength.

Complete the formula for the Sector RS reading by selecting the correct entry for each of the fields.

- Select One - - Select One - - Select One -

( / )( ) = Sector RS Reading

Score Test

Submit

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PnF University

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PnF University

Lesson 6 Introduction

Here we put it all together. Everything you have learned in the previous 5 chapters
will come together here. We will show you how to combine different aspects of the
market to assess risk for trades or long term investing. Rules of investing and trading
examples. You will see how important it is to understand each individual concept
combined with the larger picture to make informed decisions towards your
investments.
Test yourself at the end of the chapter to sharpen your skills.
As with any chapter, if you have any questions, click on the questions button (?) and
it will be answered shortly (within 48 hours). You can also look at the link for
questions above and see if the same question has already been answered.
Message Board

Go To: Lesson 6, Part 1

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PnF University

Timing the Trade

Now we put the pieces of the puzzle together. Truly successful investors have some
guidelines they adhere to religiously. The following steps, combining what you have
learned in the previous chapters, will help you develop an effective game plan.
Part1: Initiating Positions - Four Step Check List
Part 2: Stock Selection Criteria/Techniques
Part 3: Summary
Part 1: Initiating New Positions - The Four Step Check List.
INITIATING NEW POSITIONS: A FOUR STEP CHECKLIST

As we have said many times in the past, we recommend a top-down approach to

investing. In light of that, we designed a four step process that you should go through
when initiating new positions. Many of you are probably well aware of this approach,
yet we thought it would be a good review for you, given the recent changes in the
market indicators. Below we list the four step checklist -- each step is listed, then we
list ways that you can accomplish each step. In addition to that, we have supplied
you with a checklist of sorts to help you accomplish Step Four more easily. We
recommend that you literally go through and evaluate each stock you are considering
buying. Once you have determined a fundamentally sound inventory to work from, go
through and write down the Pro's and Con's (technical picture) of each stock you are
considering for purchase. The checklist below can help you accomplish this.
Basically, it is the old saying "a picture paints a thousand words" - you will be able to
clearly see before your eyes, in writing, the positives and negatives of each stock.
Hopefully this will help you make sound, clear-cut decisions, without emotion.

STEP ONE:
What to Do: Use the NYSE Bullish Percent, Option Stock Bullish Percent, OTC
Bullish Percent, High-Low Index, 10 Week and other indicators to determine if you
play offense or defense.
How to Do It: Every Thursday, we review all of our Technical Indicators in the Daily
Equity Report. In addition, we feature important changes in the Option Stock BP,
High-Low Index and other daily-kept indices intra-week in the Market Comment
section when changes occur. You can also follow the market indicators using our
DWA Internet Database/Charting site.

STEP TWO:
What to Do: Determine which sectors suggest offense (and what their respective
field position is) - those in a column of X's on their Sector Bullish Percent chart. It is
best to stay with those sectors that are bullish and below 50%. Determine how a
sector is doing relative to the S&P 500. Ideally, you want to invest in sectors which

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PnF University

are outperforming the SPX (are in a column of X's on their RS chart).

How to Do It: Every Thursday, we update the Industry Group Bullish Percent
readings; and present the Sector Bell Curve. This allows you to see where each
sector lies and what its status is. As well, in Thursday's report we do a summary of
all the changes in the Index Relative Strength readings. The sector bullish percent
charts and the Index RS charts are available for viewing via our internet site, too.

STEP THREE:
What to Do: Create and maintain an inventory of stocks to work from. Use any
number of sources available to determine those stocks deemed fundamentally
sound. In this step you are determining "What" (specific stock) to buy.
How to Do It: Use your firm's Recommended List, the S&P Outlook STARs, Value
Line 1's & 2's, or some other fundamental sorting method you deem reliable.
Separate your fundamental list (inventory) by sector. Then keep a Point & Figure
chart on those stocks you deem the very best fundamentally (again separating them
by sector). Our database program allows you to set up portfolios, so you could easily
keep a "fundamental favorites" list using that function.
STEP FOUR:
What to Do: Review fundamentally sound stocks on a technical basis to cull out
those controlled by demand, those that demonstrate the best technical picture. This
will narrow your (fundamental) inventory down to those issues with the best
probability of moving higher. In this step you are determining "When" to buy a
specific stock.
How to Do It: Keep your own charts (update them daily by hand). Read the Daily
Equity Report each and every day as we present a multitude of technically sound
ideas each day. Use the DWA Internet Database site - in particular, the "Search/Sort
Query Function". When trying to narrow your list down using Dorsey, Wright
Research, you should ideally focus on those stocks which are in an overall uptrend
(trading above their bullish support line), have positive relative strength versus the
market and their specific sector, are on a point & figure buy signal on their trend
chart, have positive momentum, and present a good risk-reward ratio.
In summary, try to adhere to this four step checklist when initiating new positions. By
paying attention to the market and the sector risks (opportunities), and then coupling
the fundamentals with the technicals, your odds of success should increase. Not
every trade will work out, but this gives you a definable "Game Plan", something your
competition doesn't have. Stick to the plan, make your decision, then manage the
outcome.

Go To: Lesson 6, Part 2

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Part 2: Stock Selection Criteria/Techniques.

Fine Tuning Your Entry Point -- (A closer Look at Step 4)
We discussed the 4 step proccess and will now take a closer look at step 4. This is
evaluating the individual stock on a technical basis. The first two steps, evaluating
the Markat and Sector were covered in previous chapters. The third step, working
within a group of fundamentally sound stocks, is left to you. Before you can evaluate
a stock you must first identify your investment goals. A trader will evaluate a stock
differently than an investor. The trader may only be looking for a couple points while
the investor has a longer time horizon in mind.
1: The PnF Chart. Patterns, Resistance, Support, Change in Trend, Big Bases.
When evaluating a chart watch for areas of support and resistance. If you are
considering a long position you want to make sure the stock has not risen to a
resistance level. Look for pullbacks to support as buying opportunities. Trend line
violations are very significant and should not be ignored. A stock that violates a trend
line is standing up and shouting "Look at Me!" If you own a stock that has violated its
bullish support line you MUST evaluate it. You may choose to give it additional room
or you may choose to sell it, but whatever you do make sure your game plan is in
place and updated. Finally, watch the chart for patterns that have been successful in
the past. We have discussed many in this university such as the Bullish Catapult and
the Bullish Triangle. By sticking with charts that have patterns showing demand in
control your chances of success are greater. With all of the fundamentally sound
companies available for you to invest in, why buy one that dosen't have a chart
showing demand in control.
2: Relative Strength. The best combination for RS is positive (buy signal) and in a
column of X's. Watch for changes in signals, and for reversals. Keep track of those
stocks that hold up well despite sector weakness, market divergences. Check the
relative strength chart to be sure the stock is currently outperforming the broad
market. At least insure the stock is rising in a column of X's on its relative strength
chart.

3. Sector Rotation. Constantly stay abreast of where the particular sectors reside
with respect to their field position. If a sector is below 30%, watch closely for a
reversal up and be ready when it does. You can consider toe-dipping when you start
to see the sector up tick. Take note of any changes in status. Be aware of nuances
for particular sector bullish percents. Couple this with sector RS, placing emphasis
on positive RS sectors.
4: Momentum - Daily, Weekly, Monthly. Important to watch for changes from
negative to positive, especially if it has been negative for a long time. We use weekly
momentum predominantly, but daily is very helpful for short term trading; and
monthly is helpful for longer term changes in direction.

- Momentum: Following weekly momentum is very helpful when timing trades. A

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positive weekly momentum suggests higher prices and negative momentum

suggests lower prices. Weekly momentum is a shorter term timing tool as changes to
positive or negative weekly momentum last 6 to 8 weeks on average. We can
calculate the number at which momentum will change to positive or negative. If the
price of the stock is below or above the cross point the momentum changes. A price
(last) that is lower than the cross number turns the momentum negative. A price that
is higher than the cross number turns the momentum positive.
5: Trading Bands - 10 day and 10 week. These calculations give you an idea of the
overbought or oversold nature of a stock. The weekly distribution uses 10 weeks of
data. It is displayed on the charts using TOP, MED, and BOT at the corresponding
levels. Top equates to 100% overbought and BOT is 100% oversold. Med is the
midrange where we say the stock is neutral (normal) on its distribution.
Wkly Distribution

+ + +
+ | +
+ | +
+ | +
+ | +
+ | +
+ | +
+ | +
+ | +
-------------------|-------------------
100% Oversold Normal 100% Overbought
6: Gaps Down. News items or earnings reports come out that cause a stock to drop
sharply. Often times it will get an initial bounce back up. Watch to see if stock has
pulled back to an area of good support. This situation often provides quick trade. You
can use the 18 O's down link to find potential ideas.
7: Risk-Reward: Has the stock pulled back? Identify the stop point, what the Price
Objective is, where the resistance lies, and if the stock is close to support. You want
to know what the risk is if the trade does not work out. You must be able to handle
the worst case scenario.

Go To: Lesson 6, Part 2

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PnF University

Part 2: Stock Selection Criteria/Techniques.

Fine Tuning Your Entry Point -- (A closer Look at Step 4 cont.)
8: Taking Profits. Have an idea of what you are looking for going into the position.
This relates to Risk Reward mentioned on the previous page. Have a sell discipline,
be willing to take partial profits. Sell a third once up 30%. Sell a second third once up
50%. Hold the last third until technical picture dictates. This allows you to take money
of the table but at the same times lets the position run.
9. Stop Points - When a trade doesn't work out. Know your stop point and respect it.
Be willing to take action, don't become paralyzed. You are willing to take small
profits, also be willing to take small losses.
10. Review Positions. Constantly review the stocks you own. Raise the stop points.
Evaluate the reasons why you bought the stock, have those reasons changed?

11. Don't fall in love with a position, is there something better? An account has
limited capital so ask yourself if the position is the best one to be in here, i.e. did you
buy the stock for a trade then it became a long term investment? Are you tying up
capital that can be put to better use? This goes hand in hand with reviewing your
positions regularly. Don't get sucked into "the fundamental trap" - has the technical
picture deteriorated.

Go To: Lesson 6, Summary

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PnF University

Lesson 6 Wrap Up

This university has been a good starting point to learn about the Point and
Figure Methodology. However, be sure to get a copy of Tom's book on Point
and Figure charting. It is the most complete resource on the topic. Over these six
lessons we have covered the PnF methodology in detail, from the basics of how
to chart to the details of how our market indicators are created and followed.
Lesson six provided details of how you can take what you have learned and
create a playbook for suscessful investing. It is important to note that this
methodology is not a science but an art. To be good at this methodology
requires pratice, and a lot of it. Only by constantly evaluating charts will you
refine your skills and become a true craftsman. As we like to say, once you find
religion you have to attend church.
The link in the lower right will take you to a case study. In the study you will be
given indicator data as well as charts on stocks. You will be given $200,000 of
pretend money to make investment decisions. The charts and data are real
although the names have been changed. at the end we will tell you when and
who you were investing in. Be sure to read the directions and have fun!
Go to: Case Study

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PnF University

Lesson 6 Wrap Up

This university has been a good starting point to learn about the Point and
Figure Methodology. However, be sure to get a copy of Tom's book on Point
and Figure charting. It is the most complete resource on the topic. Over these six
lessons we have covered the PnF methodology in detail, from the basics of how
to chart to the details of how our market indicators are created and followed.
Lesson six provided details of how you can take what you have learned and
create a playbook for suscessful investing. It is important to note that this
methodology is not a science but an art. To be good at this methodology
requires pratice, and a lot of it. Only by constantly evaluating charts will you
refine your skills and become a true craftsman. As we like to say, once you find
religion you have to attend church.
The link in the lower right will take you to a case study. In the study you will be
given indicator data as well as charts on stocks. You will be given $200,000 of
pretend money to make investment decisions. The charts and data are real
although the names have been changed. at the end we will tell you when and
who you were investing in. Be sure to read the directions and have fun!
Go to: Case Study

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PnF University

Lesson 6 Wrap Up

This university has been a good starting point to learn about the Point and
Figure Methodology. However, be sure to get a copy of Tom's book on Point
and Figure charting. It is the most complete resource on the topic. Over these six
lessons we have covered the PnF methodology in detail, from the basics of how
to chart to the details of how our market indicators are created and followed.
Lesson six provided details of how you can take what you have learned and
create a playbook for suscessful investing. It is important to note that this
methodology is not a science but an art. To be good at this methodology
requires pratice, and a lot of it. Only by constantly evaluating charts will you
refine your skills and become a true craftsman. As we like to say, once you find
religion you have to attend church.
The link in the lower right will take you to a case study. In the study you will be
given indicator data as well as charts on stocks. You will be given $200,000 of
pretend money to make investment decisions. The charts and data are real
although the names have been changed. at the end we will tell you when and
who you were investing in. Be sure to read the directions and have fun!
Go to: Case Study

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PnF University

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PnF University

Welcome to the Dorsey Wright and Associates (DWA)

Point and Figure University!

DWA is dedicated to the education of investors in the Point and Figure Methodology.
Now you can learn one of the simplest yet truest forms of technical analysis easily,
right here on the web.
A complete online classroom will take you from the very beginning chart basics into
advanced charting techniques. Throughout the PnF University, your progress and
overall understanding will be evaluated and tracked with assistance in areas of
weakness. By the completion of this interactive University, you will have an important
technical analysis tool to enhance your investments and portfolio performance. Sit
back, relax and enter the world of Point and Figure Charting.

Registering for University. University Updates:

You are now logged on as Daniel R Some parts of this University are still
Beteta Just click any of the links being developed. We will update
on the left to continue. here any new features available and
any upgrades that have been added.
You may continue at Lesson 6,
Page 6 by Clicking Here

Recommended Materials: Live Online Classes:

It is highly advisable to have in your Coming soon DWA will have live online
possession a copy of Tom Dorsey's classes through a bulletin board posting
book "Point and Figure Charting" while system. Tom Dorsey along with guest
taking these classes. His book has speakers, will be scheduled to discuss
many additional examples and Point and Figure and different
explanations available. You may order investment tactics. Each class will be
his book through the DWA Store, saved in archive and can be reviewed at
Traders Library, Amazon.com, Buy.com any time. Other investment or charting
or your local book store. techniques will also be discussed and
Also, some graph paper is useful for experts in those particular fields will be
charting practice. invited to conduct those classes.
DWA has a two week free trial offer that Check here for class schedules
you may use while taking these classes coming soon.
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 PnF University

How to use this University:

Navigation: Located on the left hand side are the Lesson buttons. Start with
Lesson One and work your way through to the last lesson available.
Each lesson progresses into the next, it is important to finish one
lesson before continuing to the next.
Tests: At the end of each lesson there is a brief test covering the materials
in that particular lesson. The database will process your answers
determining any weak areas to be reviewed again.
Glossary: Description of terms used in the University are available here.
Anecdotes: This section will grow with time as Tom Dorsey and other DWA
analysts describe their experiences and personal lessons learned
during their investment careers.
History: A History of Point and Figure Charting, how it began and examples.
Exercises: A section that provides additional exercises to sharpen your skills.
Questions: Previous questions will be posted here and you may find an answer
to any questions you have in this section.
Help - Each lesson will have a help button available, an email system,
School enabling you to email a question to the "School Marm" of the
Marm: University. Your questions will be answered within two business days.
Here we will place Frequently Asked Questions about Point and
FAQ:
Figure Topics.
Technical Contact DWA with any technical problems regarding the University.
Help: Email addresses provided.

We are always interested in comments or suggestions. Please email us and tell us

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For technical difficulties please refer to the email provided in the Help menu.
Start the University!
Copyright Dorsey Wright and Associates

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