In the last commentary, we discussed the significance of using an objective gauge of market activity by the employment of simple point and figure charts. While this gauge is crude and not that useful for short term trading, this tool does give a good longer term view of market momentum. It is indispensable to determine whether to add to favorable positions or to abandon them because of significant trend change.
Market action of late has been very volatile with new lows followed by new highs, only to sell off once more to new lows. This is very confusing, even to market professionals, but there are a few tools to use which can give a measured, objective perspective on market position. Trend following tools are valuable of course, but a quick glance at a point and figure chart will be the simplest way to objectively determine important support and resistance levels.
The previous posting made comment about ARKK, an investment vehicle with holdings in many of the high beta stocks which have been responsible for the strong rally in the Nasdaq index. At the time, the popular stock indices such as the Nasdaq, Dow Jones and S&P indices were marking time at best, pausing after a period of steady advances.
The point and figure chart of ARKK showed some oddly negative divergent action to the bigger indices as reprinted below:
This should have given pause to anyone holding a position or looking to enter a position into ARKK. We fast forward to current activity and observe that indeed, the weakness shown at the time as compared to the overall indices, was a clue that the stock was weak. Recall that point and figure charts are not determined by time, they are solely concerned with price thresholds. Thus, a chart can be rangebound for many years before embarking on a significant up or down move. Typically, a move beyond key levels can result in significant action.
In that same posting, we mentioned that the energy sector ETF, XLE, looked like it was primed for a move higher and this was confirmed by the chart of crude oil, $WTIC, showing similar bullishness.
On the other hand, a speculative anticipation of OPEN did not pan out and once the point and figure parameters were violated, the issue collapsed as did MRIN. As in all indicators, point and figures will give evidence of a trend or emerging trend change and more importantly, some hard risk parameters.
Ascertaining trend and controlling risks constitute the majority of the skills needed for trading and investing.
At this juncture in the market, using a very simple tool such as point and figure will aid in decisions not only for individual issues but also for the larger picture of stock index and commodity prices. There are no shortage of market pundits professing their convictions about market direction, but it remains to individuals to have some objective means of determining their own risk threshold. In the words of Ronald Reagan, trust but verify.