V.7:4 (106-108): Point and figure: Analysis and projection Part 2 by Charles Idol

Point and figure: Analysis and projection Part 2

by Charles Idol

The fundamental pattern in point and figure charting — the congestion area — occurs after a substantial rise or fall in the price of a stock as the investment community adjusts to the new price. This congestion area looks like sideways price activity within a trading range (Figure 1). As a rule of thumb, the trading ranges are about 15% of the price for a low-priced stock, 10% for a medium-priced stock and 5% for a high-priced stock.

Usually, you use the one-point box, one-box reversal charts (a 1x1 chart) to study congestion areas, although with stocks selling below $20, the half-point, one-box reversal chart may turn out better. Point refers to the amount of price change necessary to generate an "x" or an "o" along the y-axis. Box is the number of price points necessary to change from "x" to "o" along the x-axis. Figure 1 is a 1x1 chart for the hypothetical Universal Widget Corporation. I've numbered the columns of the chart to assist our analysis. Notice the congestion pattern between columns 14 and 27 when the price ranged from $28 to $31. Because this pattern formed at the base of a decline, we recognize it as a support level — a price at which any future declines will encounter resistance.

The strength or effectiveness of a congestion area as a support or resistance level depends, in part, on its width. The definition of how many columns make a wide area depends on the individual stock.