V.11:2 (76-79): Point & Figure Relative Strength by Michael J. Moody and Harold B. Parker

Point & Figure Relative Strength by Michael J. Moody and Harold B. Parker

STOCKS & COMMODITIES contributors Michael J. Moody and Harold B. Parker suggest using point and figure and relative strength as a way to identify strong and weak stocks.

It has often been asserted that long-term relative strength of individual stocks is an important component of trading success. This makes intuitive sense: one ought to be able to construct a portfolio that outperforms the market by selecting stocks that are stronger than the market on a relative basis.

There are numerous formulations for relative strength. Mansfield Charts, for example, calculates a performance ratio that is a percentage comparison with an index average. Daily Graphs reports a scaled percentile number with the most recent quarter more heavily weighted. The methodology examined here, however, is the relative strength buy and sell signals generated by the Chartcraft point and figure method.

We chose this method for several reasons. First, Chartcraft asserts that relative strength signals are an important component of trading success. Second, Chartcraft claims that the signals are long term in nature, often lasting two years or more. If they are reliable, long-term signals have obvious appeal because they can help control transaction costs. Point and figure charts are appealing in another important way: they have clear-cut buy and sell signals and do not require subjective interpretation of rising or falling ratio lines.

Although point and figure charting is an old method for posting stock prices, some readers may not be familiar with the methodology.