Point & Figure Charting: The Essential Application for Forecasting and Tracking Market Prices (Fourth Edition)

October 31, 2014 07:00 PM

Point & Figure Charting: The Essential Application for Forecasting and Tracking Market Prices (Fourth Edition)
By Thomas J. Dorsey
John Wiley & Sons, Inc.
$70; 386 pages

Tom Dorsey is recognized for his keen insight into using point-and-figure (PnF) charting techniques to provide investment guidance to financial advisors, brokers, investment banks and institutional investors, as well as retail investors. Through his research firm, multiple books, and webinar and conference presentations, Dorsey has provided guidance to thousands of clients over many years on the importance of first determining the stock market’s general health before investing. 

A PnF chart is composed of a series of vertical boxes with X’s and O’s representing an increasing or decreasing price movement in a security, respectively. Time is not measured in this approach—only price movement of certain pre-determined size based on the security’s price. For example, a $50 stock could have each box representing a move of $1, which switches to a column of 0’s after a $3 downward move.

Compared to the 1995 first edition of this book, the latest update is 150 pages longer and concentrates much more on the value and methodology of basic and advanced relative strength analysis, sector rotation and the use of ETFs as investing vehicles. In the past decade, relative strength and sector rotation have found many followers, especially among technicians and market timers. Therefore, it is no surprise that the use of PnF charts have mushroomed in the last decade, as they are considered to be a valuable and profitable way to evaluate the markets. 

The PnF three-box reversal method was developed by A.W. Cohen, founder of Chartcraft Inc., in 1947 and has been enhanced over the years with the firm’s introduction of the NYSE Bullish Percentage and the Advisor Sentiment Survey. Dorsey has further led the charge to add powerful new features to the standard PnF analysis with the introduction of the DWA Relative Strength Chart Matrix, World RS Matrix and use of equally weighted indexes, among others. He is a firm believer in first determining when an investor should be in the defensive (selling) or offensive (buying) mode. This field position is determined by viewing the NYSE Bullish Percentage PnF chart and identifying specific extreme levels (above 70% and below 30%). Once one of those levels has been reached and then reverses in the opposite direction by three boxes, a change in market direction is signaled.

Dorsey’s book provides a comprehensive review of the PnF fundamentals, including the bullish and bearish chart patterns and market breadth indicators. He also highlights the latest uses of the PnF methodology, all explained with charting examples for the applications. Dorsey’s firm manages a number of ETFs based on relative strength analysis, which have done well compared to their benchmarks. Their ticker symbols are PDP, PIE, PIZ, DWAS.

Overall, the author provides a complete education on the usage and benefits of PnF charts. Additionally, a PnF tutorial on the subject matter is provided in the publisher’s website connection. Adding the PnF technical tools to one’s investing arsenal will provide additional insight into the market’s current condition and potential directional change, as well as which sectors, stocks and ETFs are the strongest or weakest candidates for purchase or sale, respectively. With today’s inexpensive and lightning fast PCs, any investor can now obtain PnF charts for free on websites such as stockcharts.com and incrediblecharts.com, as well as on many brokerage firm complimentary charting programs. In addition, Dorsey’s firm provides a high-powered suite of PnF tools for use by professionals and retail investors.

Leslie N. Masonson is a day trader and the author of Buy DON’T Hold and All About Market Timing (Second Edition). Reach him at lesmasonson@yahoo.com

About the Author

Leslie N. Masonson is the author of Buy DON’T Hold and All About Market Timing, (Second Edition).  Reach him at lesmasonson@yahoo.com.