Determining Market Condition Using Point And Figure

Technical analysis has evolved in many ways since the first time someone decided to plot the movements of stock prices on to graph paper. The logic behind this was to systematically determine the direction of prices over time.  The underlying premise of all analysis of course is the notion of trend.  Once a ‘trend’ has been identified, the idea is to participate in that trend until that changes.   Simple in concept, but not always that easy in real time.

Over the years, innumerate techniques have been created to ascertain the direction and movement of stock prices. Untold amounts of computer power and the keenest academic and mathematical minds have made the art of divining the direction of stock prices into arcane science.  As discussed in previous posts, this pool of expertise has managed to concentrate much of what we see as stock market activity into fewer and fewer hands.

This doesn’t meant that the average person is handicapped in tracking the direction of stock prices.  While there are always techniques and indicators which profess to give the best timing tools, there are some very fundamental indicators which still work very well, very old school indicators in fact. 

One of these techniques is point and figure charting.  In some ways, this is the purest form of analysis since price is the only determinant.  There is no reference to time or momentum statistics.  The prices are charted purely on the basis of whether they are advancing or declining.  This is a big picture tool, not one that would be used in short term trading; instead point and figure charts are for determining possible changes in long term trends.

The concepts of support and resistance are key to using this tool.  Logically, as prices pierce previously strong levels of support or resistance, it signals that new ‘informed’ money has likely started a new trend.  Point and figure charts can give an unbiased view of what money is actually doing at previous levels of significance.

This is especially interesting in markets that have been long dormant or trapped in a sideways range.  Once prices move beyond old thresholds, the likelihood is good that they will continue to accelerate.

Some charts are shown here to illustrate the present condition of various instruments all at varying points of trajectory.  The first two charts are of the Dow Jones index and the QQQ etf which is a proxy for the Nasdaq markets.  We can see that the advances have been constant for a long period of time and the only thing we can note now is that the markets are in a consolidation phase.  While prices are elevated, we cannot say at this point that they are anything other than consolidating. 

QQQ
Dow Jones

The following chart of WYNN shows range bound price action which was decisively broken by a piercing of the 120 level in early July of this year (indicated by the number 7). 

WYNN

Of interest, I also post  a chart of ARKK, which is a proxy for many of the high concept technology stocks that have been dominant in market activity.  Of note here is the piercing of an area of support while the broader QQQ doesn’t exhibit such weakness.

ARKK

The next group of charts shows what appears to be emerging strength in the charts of XLE and WTI or crude oil.   Both seem to point to higher prices ahead.

West Texas
XLE

Finally, we show some more speculative issues that look to be breaking out their downward trajectory and poised to move higher over the period ahead.

OPEN
MRIN

Again, point and figure charts are blunt instruments to be used to determine longer term trends and key areas of supply and support.  They can be very useful when assessing the overall state of markets.

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