As we now publish this classic stock market book online in the year 2009 I cannot help but to draw parallells between DeVillier's and Taylor's foreword and the market we are facing today. When the book was first published, in the beginning of the 20th Century, the world had recently witnessed the stock market crash of 1929 and the following great depression. Today, 80 years later, we are again in the midst of a global recession, following the "Financial crisis" when stock prices crashed from the all time high of 2007.
Again, many investors and traders now turn to the literature of economics and market technique in order to get a better understanding of the principles underlying stock price movements.
We are delighted to present this method of stock charting and trading to a wider audience than ever through the Internet. The method we are presenting is as valid today as it was one decade, as well as one century ago. Unfortunately, with today's stock charting softwares and methods the underlying principles of stock price movement have been forgotten. Instead traders and investors are foolishly lured into believing that the bells and whistles of some of the stock charting softwares will make them profitable in their stock market campaigns. We would instead like you to forget about the flashing lights, the colorful indicators and lines, and instead begin focusing on the stock price itself like the professionals. The forces of supply and demand determine the stock price movement - let the same forces guide your way.
Unlike the times of the great traders like Jesse Livermore, R. Keene, W.P. Hamilton, Charles Henry Dow and others who had to keep track of the stock prices by hand or in their memory we now have the possiblity to follow their methods of making millions while utilizing the power of the computer. Along with this book we are delivering point and figure charting software. This means we are combining the proven methods of trading with modern ways of working with computers to simplify tedious repetitive tasks. We are publishing two types of computer software explicitly intended for point and figure trading. The first one is called "Bull's-Eye Broker", and the other one is called "Point and Figure for Microsoft Excel".
We now urge you to join the group of stock market professionals. Read this classic book, it's teachings are as valid today as ever before. Download the free trial of the software we are publishing. Let the point and figure method of trading become your own way of speculating successfully in stocks, commodities, currencies and forex.
pointandfigure.com Wall Street, New York City October 2009
Wall Street, New York City
TABLE OF CONTENTS:
PREFACE TO THE ONLINE EDITION
PREFACE TO FIRST EDITION
INTRODUCTION TO FIRST EDITION
Chapter 1 - THE PRINCIPLES OF THE POINT AND FIGURE METHOD
Chapter 2 - THE WEIGHT OF AUTHORITY BEHIND THIS METHOD
Chapter 3 - ADVANTAGES OF THIS METHOD OVER OTHERS
Chapter 4 - THE VITAL POINTS
Chapter 5 - APPROVED METHOD OF ASSEMBLING AND MAINTAINING PROPER DATA
Chapter 6 - THE SCIENTIFIC FUNDAMENTALS
Chapter 7 - THE PRINCIPLES OF CHARTING
Chapter 8 - ANALYZING TECHNICAL POSITION
Chapter 9 - ANTICIPATING THE ACTION OF U.S. STEEL
Chapter 10 - ANALYZING A CAMPAIGN IN WESTERN UNION
Chapter 11 - JUDGING THE MINOR SWINGS
Chapter 12 - HALF POINT TECHNIQUE IN ATLAS TACK
Chapter 13 - THE MAIN TREND AND MAJOR CYCLE CULMINATIONS
Chapter 14 - TECHNICAL INDICATIONS AT A TURNING POINT
Experiences of the recent bear market which had its termination in July 1932 caused many former investors and traders to turn to the literature of economics and market technique in order to get a better understanding of the principles underlying stock price movements. Many have come to realize the futility of depending upon tips, rumors, and gossip to guide them in their market commitments.
Countless others have come to the conclusion that statistics and fundamentals serve only to aid the manipulators, banking sponsors and insiders to unload their stock on the unwary. All will agree that a correct analysis of the technical position of stocks and the market in general is the only key to consistent profit from speculative and trading commitments. Until the publication of the original edition of this work, it was the privilege of the few who made fortunes from speculation to have the advantage of this, the most logical and pragmatical of all methods used for the purpose of plotting the price course of stocks and commodities. This Method has been the keystone and bulwark of the plans of America's most successful speculators and commentators, from Charles Henry Dow, the father of the art of anticipating stock price movements, down to and including those who have profited most during 1929 and subsequently. We offer you the principles of this tried and proven Method because we feel that a broad dissemination of this information will do much to prevent the excesses of bull market peaks and also help avoid the unreasonable deflation of values, as well as the vicious cycles of forced selling and the resultant suffering of depression lows which so surely must follow.
We desire to express our appreciation to Mr. J. Martiney of the publisher's technical staff for the many helpful suggestions given and his care in the preparation of the charts used in this work.
We gratefully acknowledge our indebtedness to Charles Henry Dow, William Peter Hamilton, James R. Keene and others whose works and achievements have been an inspiration and a guide.
New York City
The Point and Figure Method had its beginning sixty years ago and subsequently has been used by some of the eminently successful operators in their important stock market campaigns. With the passing of the years, the Method has been refined, improved and adapted to changed market conditions. The underlying principles of the Method, however - based on the immutable Law of Supply and Demand - are unchanging and are constantly effective.
The theory and practice of the Method is fully treated in Vol. 1 The Point and Figure Method of Anticipating Stock Price Movements (written in 1933 - revised in 1934) Vol. 2 Advanced Theory and Practice of the Point and Figure Method (written in 1933 - revised in 1934) Vol. 3 The Time Tested Technique of the Point and Figure Method (written in 1939- augmented in 1940 and 1941).
The first two of these three texts were written from the viewpoint of the individual stock trader at a time when pool operators gave strong impetus to market movements. Such operation injected a manipulative or artificial element into the supply and demand relationships in the market. But Supply and Demand - whether artificial or genuine, manipulative or otherwise, and whatever their causes - are the forces that create price change. The Point and Figure Method measures these forces and enables one to arrive at sound and reliable conclusions as to subsequent price action.
This Method, a generation ago, was used largely to create profits through market operation. Today it is used by some of the largest and highest ranking fund managers whose objectives are capital and income conservation and growth. The Method also is used by commodity processors for guidance in the purchasing and hedging of their extensive inventory requirements.
In placing these texts in your hands we are conscious of their literary and technical limitations. If some principles are treated dogmatically it is for the purpose of fixing them firmly in your mind. If some of the many principles appear to overlap or seemingly conflict with others, we ask you to disregard it at the start and simply master each principle as it is expounded. Weighing and coordinating these principles is the vital factor in Point and Figure analysis. Development of skill in this technique will be accomplished and hastened by practice on your part.
Instances of extraordinary success in investment account management and in commodity market operation, through Point and Figure means exclusively, are constantly coming to our attention. Such success is attributed to the skillful use of the principles set forth in these modest texts. We mention this as an inspiration to you and to emphasize that this work is of far reaching value and importance.
Logic is the basis of this Method
Irrelevant fluctuations eliminated
How the Method got its name
Graphs are logical and scientific
Introductory summary of important principles
Needed accessories are few
Plotting a stock price movement
One point charts the basis of the Method
Accessories and working tools
Fifteen years before the turn of the last century, Charles H. Dow, student, scientist and philosopher, a brilliant economist and a well respected financial writer, began to observe and study the phenomena of Stock Price Movements. He was the founder of the Wall Street Journal. His writings, though not prolific, are the beginnings of all price movement comment, his observations the foundation underlying all technical methods, and his studies and graphic records the seeds from which the Point and Figure Method grew.
The work of Dow was ably carried on by his protege and successor, William Peter Hamilton, who edited the Wall Street Journal until his death in 1929. The writings of Hamilton form the principal source from which Dow's Theory of Stock Price Movements has become available for study. See pages 36 and 153, The Stock Market Barometer, by W. P. Hamilton.
At or around the beginning of the present century, when the expansion era was in full swing, a group of speculators recognized in Dow's research a clear illustration of price movements portrayed through the use of figures which showed a repetition of pattern as it unfolded its tracings on Dow's graphic records. The patterns thus formed were oft-times repeated, and established a precedent and guide to future price movements. Here, then, was the beginning of a truly scientific and logical method of anticipating stock price movements. Fifty years of background, millions of dollars of profits taken out of the stock market, and thousands of hours of study and development, are historical events which commend this time tried Method to you.
In explaining the basic principles of the Point and Figure Method, we will show that the full point and full figure fluctuations in variable equities, be they commodities or stocks, are the vital statistics which hold the key to technical position and the future price path.
Professionals and others who have been successful in their judgment and anticipation of market action, have reached their conclusions by aid of recorded data of one kind or another. In practically every field of endeavor, whether it be in the arts or sciences, in the industrial world, or in the stock and commodity markets, full and detailed records of past and current essential data must be kept. It is of little consequence whether these records are maintained as tabulated figures or by means of logs or charts, which are merely graphic representations and plottings of those essential records.
Charts of stock price movements are vital. There is an ancient Chinese axiom dating from the Confucian era which states "A picture is better than a thousand words." It is self-evident that a picture conveys a clearer and more detailed message than a mass of words or columns of tabulated figures. Since instant comparison and maximum condensation are vital to the art of anticipating stock price movements, we endorse the practice of keeping and maintaining up-to-date charts. Graphic representations of the fluctuations of stock prices are vitally important to a critical analysis of technical position and are the keystone of the Point and Figure Method.
Few will dispute the fact that the old fashioned custom of relying solely upon published statistics of sales and earnings for market commitments, must now be relegated to the past. All will agree that by the time these statistics become available for public consumption, others, principally the insiders, the sponsors and the manipulators, have already profited amply therefrom and are ready to unload their commitments as the news becomes public property. We must, therefore, find a method which will show us when the insiders are buying and also indicate when they are commencing to sell. Given the ability to recognize their acts on our charts, it follows logically that we will be able to buy when the insiders buy and sell out when they sell.
The patterns portrayed on our charts and application of the principles of the Point and Figure Method will show us when buying is overcoming selling and vice versa. If you are ready to agree that the present movement of stock prices, as recorded on the ticker tape, is the best and surest indication of the probable direction of the future price trend, then this Method can be used to show the way. It should be needless for us to state that some intensive study and a thorough understanding of the principles are necessary before you can hope to capitalize on that knowledge. Once a solid foundation is laid, your judgment will develop in a logical manner, and you will quickly begin to recognize many profitable opportunities. You will be more certain of yourself, and the courage of your convictions will materially increase your capital.
The market fluctuates in countless fractional transactions which, in the final analysis, have little or no influence on future price paths. One of the basic principles of the Point and Figure Method is to eliminate the irrelevant and regard only the important movements upon which our deductions are based. Only full point changes are considered, and fractional variations are totally disregarded.
The Point and Figure Method derives its name from the fact that we record by figures all full point changes. This plan or system of plotting and recording the movements of the market in general, and of selected individual stocks, is a basic principle of this particular Method. In this one characteristic, it is totally different from any other plan, method, or system of anticipating stock price movements.
A casual glance at the illustrations in this work will show a new kind of chart which, in contrast to all others, has a scientific basis to recommend its use. The Point and Figure graphic records are sometimes made up of a series of symbols composed of X's, fives and zeros. Or - more often nowadays - X's, O's for price changes, and the numbers 1-9 and A, B, C to represent the month of the year. The special design of graph paper which we suggest for use with this Method shows the relationship of these symbols to each other and to the past and probable future price movement. Familiarize yourself with the form and style of these important aids, namely, the charts upon which we rely for our conclusions. Point and Figure charts condense the price fluctuations in such a manner that you will soon learn to recognize accumulation, mark-up, and distribution and thus be able to make your commitments more profitable.
The Method will be fully explained in every detail as we proceed. Each step will be carefully developed and clarified before we proceed with the next. All will be illustrated with examples from recent market action, showing the application of the principles. So that you may have a bird's-eye view of the scope of the work, we list a summary of the important principles underlying the Point and Figure Method.
1. The Method develops the ability to recognize the technical position of individual stocks and of the market in general.
2. The Method is consistent and logical, definite and positive, eliminating, as far as possible, guesswork and emotional influences.
3. The data is recorded in such a manner as to create and force the development of true geometrical and symmetrical patterns easily discernible and classified, and which repeat themselves in the progression of the price path.
4. The patterns thus formed create precedents by which subsequent price movements are easily judged.
5. The Method disregards fractions resulting from minor and irrelevant fluctuations. It also ignores volume. The Method is simple and complete in itself.
6. The Method dispenses with news, fundamentals, statistics, and the reasons for price movements. It concerns itself primarily with cause and effect.
The data which we record in order to create the basis for the application of this Method is, primarily, all one point changes of the price movement as it fluctuates. This principle is the same whether we apply it to stock price movements, market indices, or commodities. As a matter of fact, the Point and Figure Method of anticipating price movements may be applied to any form of equity for which a free and open market exists, and in which there are price fluctuations. When full point variations of the price movement are known, they are recorded by figures. Our records are unlike the conventional vertical line or bar charts in that they are created through the use of symbols. The symbol "X" is used to record the price changes in an uptrend and the symbol "O" is used to record price changes when price is trending downwards. The figures 1, 2, 3, 4, 5, 6, 7, 8, 9, A, B, C are used to record the month of the year. At this point, it would be well for you to examine the illustrations used in this book in order that you may have a better understanding of this elementary principle used in making our charts.
The full figure one point changes are recognized by the price fluctuations when they reach each new full one point change. The change thus noted is recorded, whether it be the next higher or the next lower figure, and the change must be recorded each and every time it shows on the tape. At this point, let us emphasize the fact that herein lies the vast superiority of this Method over all others. When we record all full figure changes, we are better able to detect accumulation, distribution, and the characteristics peculiar to the particular stock or commodity under observation. Note, here, that we disregard all movements of seven-eighths points or less, when fluctuations are in eighths. In cases where fluctuations are in tenths or dollars, we must determine whether we will plot the full one-dollar changes or whether the changes in tenths would better serve our purpose.
After we obtain the full figure changes, we proceed to make our graphic record from that data. We require for that purpose, graph or charting paper ruled for quick and easy use. Ideal paper for this purpose is "Ideal Charting Sheet Number 5001." This paper is ruled with vertical and horizontal columns, arranged with shadowed symbols "0" and "5" and with the horizontal columns for these important digits accentuated.
The vertical columns on our charts are used to limit the plottings of the price movement as long as it continues in one direction without a reversal. As soon as a reversal occurs, and we find the needed square already occupied, we move to the next right-hand vertical column. This vital principle must be fixed firmly in your mind, as it is the only one that may give you difficulty later on when you proceed to make your own charts.
The Point and Figure Method relies on price changes only, and the graph paper is designed to properly record those changes. The day-to-day time factor and daily volume are ignored. The columns of squares are scientifically designed so as to permit the plotting of true trend lines and to force the development of true geometrical and symmetrical patterns which facilitate accurate comparisons and dependable diagnosis.
In the case of a stock selling at $20 per share, we would record the zero in the square on the 20 line. The next record would be made when the stock sells at flat price 21, or at flat price 19. Should it go down to 19.22, or up to 21.11, no change would be made.
When a series of full figure one point changes of a price movement have been recorded, they create a scientific basis from which to draw conclusions. Because of the fact that similar causes usually create similar effects, our conclusions have a dependable basis not available through the use of any other method. In addition to the one point charts, one may easily prepare from them either three or five point charts or both. These are helpful for gauging the technical position of any and all issues, volatile or otherwise, and for revealing the broader intermediate moves of stocks and the market.
In addition to graph paper, one needs a record of the actual full figure changes garnered from the most accurate source, the ticker tape. When using this especially designed paper and the daily service which is available, it is a relatively simple matter to keep current the needed changes on one hundred stocks and the important popular averages or indices, in about thirty minutes each day. Form this habit, as it will afford you an opportunity to analyze the patterns as they unfold themselves on your charts and thus take advantage of the implications which develop, first in one issue and then in another. The little effort expended in keeping these charts up to date will soon pay you handsomely, for you will be training yourself in stock market technique in a way not afforded by any other method.
Refined to coordinate with present day markets
Mystery and complications have been clarified
Expensive financial and economic reports unnecessary
Certain factors taken for granted
Analytical technique easy to master
Losses limited while profits accrue
Method weighs forces of buying and selling
The Point and Figure Method has grown from a crude beginning which started more than one hundred years ago. Charles H. Dow, the founder of the art of anticipating stock price movements, created much which led to the development of the technique of this Method. Dow, in his research, was interested primarily in recognizing the main, broad, long term trend which results from the movement of major capital into or out of common stock equities. This main trend was rightly termed the "Capital Movement Trend" by Mr. Edwin L. Ayres in his book Key to Stock Price Movements. The secondary corrections to the main trend, though of interest to Dow, were not the goal of his efforts. He considered the secondary movements highly misleading and concluded that the shorter day-to-day swings were unimportant.
However, we must bear in mind that since Dow's work was completed, the stock market and America's financial structures have undergone revolutionary changes. Common stock equities of American corporations have attracted a world-wide speculative following, unprecedented in the history of finance and of speculation.
In Dow's era, a move of 20 to 30 points in the Industrial or Rail Index consummated in a period of a few years was considered a complete bull cycle. Under present day conditions, we note, on occasion, moves of 10 to 20 points in either or both indexes completed in a few weeks. Three, nine or sixteen million share days, such as were recently witnessed, were undreamed of at the time when ten or a dozen stocks were the active trading mediums, and volume was limited to a few hundred thousand shares a day. One can, therefore, understand why Dow passed lightly over the minor and secondary movements and sought only to ascertain the main trend. These minor and secondary movements have now become all important. Their study, analysis and the understanding of how to use them form the basis of the most successful method of stock price anticipation.
It has been intimated that this Method was first successfully used by James R. Keene during the merger of the United States Steel Corporation in 1901. Mr. Keene was employed by the sponsors of the Steel Corporation to distribute to the public the original stock of the corporation, which its real founder, Andrew Carnegie, refused to take in payment for his equity and profits resulting from the merger. Mr. Keene, originally a Western mining promoter, was a skilled tape reader, a shrewd observer, and a successful market operator. His ability has never been surpassed and rarely, if ever, equalled. It has been stated by his close associates that the Point and Figure Method was known to and used by him during all of his successful campaigns.
Like all knowledge, the Method has developed with the passing of years and has been refined, improved, and coordinated with the ever changing conditions of stock market action. The scientific basis of the fundamental principles underlying the Method alone accounts for its survival while most other methods have been relegated to the past. You may confidently depend upon the Point and Figure Method knowing, first, that it rests upon a sound scientific basis and, secondly, that it is vastly superior to any other plan for anticipating stock price movements. In the past as well as at present, it has been and is relied upon by many of Wall Street's most successful interests.
The data which should be kept will be described in utmost detail. Bear in mind that there is a great weight of authority behind this data, and we ask of you to respect its implications. We have found by the trial and error method those refinements needed to fit the basic principles to present day markets. It was ascertained that a careful checking and rechecking of the conclusions arrived at by means of this Method is of vital importance and cannot be over emphasized.
The Point and Figure Method, as here presented, is devoid of mystery and complications and has proven itself of incalculable aid to your authors. We begin by reducing the vast accumulation of transactions comprising market action to the important and relevant moves, which are plotted on charts. From these graphs showing the present market action, we are able to judge the probable future direction and extent of a stock's movement.
The Point and Figure Method permits stock market trading to be considered a serious business with a scientific, substantial, and definite background, based upon actual facts rather than guesswork. Like all other businesses, it demands the making and preserving of certain simple and vital records. It demands that you study those records carefully and permit your judgment to be based upon solid facts. None will deny the old copy book maxim "Practice makes perfect." The Point and Figure Method actually compels practice and extensive study which soon becomes a habit as well as a fascinating hobby.
This Method dispenses entirely with the expense and labour involved in the purchase and maintenance of bulky reports, statistics, balance sheets, earnings statements, and other cumbersome paraphernalia hitherto associated with trading and investing. The substitution of the simple records required by this Method is, in itself, an important consideration and a welcome relief.
The following facts are taken for granted by the Point and Figure Method:
(a) That the correct valuation of a stock, at any given time, is the price paid for it at the time of the consummated sale. This is because the forces underlying the law of supply and demand and the consensus of opinion of the buyers and sellers have determined the value at the time the sale is made.
(b) That the last published price of a stock reflects all that is known by the general public at the time when established, as a result of a sale and purchase which consummates a transaction.
(c) That the insiders, who are presumed to know more about any particular stock than the public, cannot completely conceal their future intentions with regard thereto.
(d) That the plans of the insiders will be revealed in due time by the technical action of the stock itself. The Point and Figure Method is not a system for "beating the stock market." It is the result of the rationalization of logical principles successfully used by important market interests.
Assuming that the student will keep the required records, there remains only the need of an understanding of the technique of reading and interpreting them. In the pages to follow, we illustrate for you in detail and with clarity the technique of interpreting the patterns which develop on your Point and Figure Charts. While proficiency may not come at first, yet, in a short time, through study, practice, and observation, the habit of correct thinking in terms of the Point and Figure Method will become apparent, and the resulting sound judgment will soon replace uncertainty and confusion.
It is confidently expected that, as a result of this study, observation, and practice, the reader will learn to properly appraise the price movements, analyze the technical condition, and deduce therefrom plausible conclusions, the correctness of which will soon exceed the errors you are apt to make. With proficiency attained, your market operations cannot help but result in profit.
Success in trading and investing, whether by method or by chance, comes not as a result of being perfect, but in consequence of completing a sufficient number of successful transactions netting substantial profits to offset the few errors which may show limited losses.
In order to limit losses and to check possible errors, we employ the simple technical aid known as "stop orders." It is unnecessary for us to go into detail here, as the theory and application of stop orders are fully described in many other works.
In no other enterprise or business is it possible to protect profits or check losses with the same ease and facility as is possible in the stock or commodity markets, through the simple expedient of stop orders. We strongly endorse the use of stop orders except where "averaging" or "pyramiding" is resorted to. Many admonitions have been given against averaging and pyramiding, yet this Method not only tolerates, but, at times, presents ideal points at which both may be resorted to, for the reason that each commitment is independent and is made on its own merits. This will be fully explained in a later chapter.
A pyramid is created when the profits accrued on a position are used to buy additional commitments. This practice usually develops into an inverted pyramid when it is resorted to in connection with credit - borrowed funds - used to finance a margin account. An inverted pyramid is exceedingly dangerous because the load gets top-heavy, as the human weakness to make huge and quick profits invites an over-extended commitment, which, as a general rule, is wiped out on the first technical reaction.
We average a position by buying additional quantities of stock as it sells lower in the price range. This Method indicates ideal points at which to make additional commitments for the purpose of averaging one's cost.
The Point and Figure Method actually measures the forces of supply and demand, and records the support and resistances at all points. It permits of a wide range of visualization through its lucid, graphic records which allows quick and ready comparison of one stock with others and with the market in general, as reflected by a good index and, most important of all, with its previous technical action. These records, if properly compiled from reliable sources, will indicate the true trend of the market and of stocks, and will point out the best trading and investment opportunities.
The Method indicates when and what to buy. It also cautions when to get out, first, through clear signals to act, then, through definite indications for the logical placement of stop orders. It teaches you to adopt a professional approach to your market transactions. Professionals may be considered as the insiders, pools, independent operators, stock sponsors, bankers, and others usually referred to as "they" by many market commentators.
Speed and ease of recording data
The Method ignores volume
Price changes versus volume
Supply versus demand
Volume easily manipulated
Facility of this method
The utter simplicity of the records
Manipulation readily detected
Use all full figure changes in making charts
Method is superior to inside information
Isolation develops best results
Our charts reveal plans of the majority
How the move begins
Stock market trading is a business
Inside information unnecessary
One point charts show all
There are certain definite and inherent advantages of the Point and Figure Method not possessed by any other method. These advantages are: (a) the elimination of non-essentials, (b) the ease of condensation, and (c) the speed by which results may be achieved. These superior qualities are again stressed in order to point out that the simplicity of this Method does not curtail its accuracy and dependability. A simple machine with a few well constructed parts will operate far more efficiently than a complicated mechanism with ponderous accessories. So it is with the Point and Figure Method.
The Method provides, amongst other things, clarity and simplicity in the keeping of its graphic records. This results in the creation of logical and clean-cut patterns on the graphs and higher speed in the plotting of the necessary data. It will enable you to maintain the records of more stocks, and be a source of checking and correlating all of the facts, with a view of arriving at a correct interpretation of market activity and profiting therefrom.
The Point and Figure Method entirely dispenses with the recording of the volume of sales. Many have felt this to be a distinct deficiency under the belief that volume is a dominant factor. We are unwilling to concede that volume is the vital influence which, in the final analysis, governs the price movement. It is conceded, however, that volume is an influence when used as an aid in other methods. In our opinion, the Point and Figure Method has proven itself so much more reliable, that we are satisfied from our research and experience to conclude that the number of price changes and the manner in which they combine themselves have a more scientific foundation than the influence of volume in the anticipation of price movements.
Let us analyze the effect of the influence of volume as against the effect of price change only. What is the aim of all methods which seek to anticipate stock price movements? Do we seek to know how many shares are exchanged? Or, do we desire to determine whether stocks are passing from weak holders into strong hands and vice versa? All will agree that it is the answer to the latter question which will permit us to profit most from our knowledge. Taking for granted the known fact, namely, that each transaction printed on the tape is at the same time a purchase by one and a sale by another, it is of little consequence to know the exact number of these transactions. What we desire to ascertain is where in the price scale they occur and their relationship to each other.
Let us approach the problem in a logical manner by taking note of the definitely known elements, in order to determine whether price changes or volume have most influence.
In a speculative market, where the laws of supply and demand are operative, we must have fluctuations in prices. These fluctuations are due mostly to differences of opinion which cause what is technically known as the bid and asked spread. Experience has taught us that a great number of fluctuations in a congestion area usually indicates either accumulation or distribution. When stock is offered for sale at the market, we must take the nearest bid price; and when one is anxious to purchase a stock and offers to take it at the market, he must pay the nearest asked price. The price changes of a stock, as it moves from one price to another, are caused by the difference of opinions of those who are buying and selling. These fluctuations have proven themselves more informative for our purpose than has volume.
Furthermore, let us consider the effect of supply and demand on any product or commodity, be it stock, equities, or horseshoes. When demand is greater than supply, prices move upward. Should supply be greater than demand, then prices are forced downward. When demand has absorbed all the supply at any given price, it will begin to absorb the supply available at the next higher price at which offerings are available. As the demand increases, prices correspondingly increase. Prices recede as a result of absence of demand or an oversupply. These factors show that price, as such, holds the key to supply volume as well as to demand volume. These fluctuations or price changes, when plotted by means of the principles outlined for you in this book, will more accurately indicate the technical condition, the relationship of supply to demand, than any other known method which can be used for the purpose.
Volume, as well as price fluctuation, can be artificially manipulated. Manipulations of volume at any given price level are deceptive and cannot reveal the difference between true and artificial demand. As contrasted with that principle, consider how easy it is to detect artificial support resorted to for the purpose of distribution when many changes in the price of a stock show that it cannot absorb the supply at the upper registered level, or that demand is insufficient to reach to the next level of supply. This principle becomes more clearly apparent as you compare these conditions in one particular stock with the market and other stocks. Volume indications have a tendency to vary greatly with the changes in the floating supply of stocks as well as changes due to the open short interest in the market. We, therefore, conclude that price changes of themselves, with their relationship to each other and to the market and other stocks for comparison, are vastly superior than is volume, used with any other combination. Herein, then, lies the vital and vast superiority of the use of price changes and the Point and Figure Method.
This Method permits and facilitates the easy recording of the essential data, and a simple and logical method of analysis. The direction of the trend, the extent of the move, and a reasonable approximation of the culmination thereof, are all easily determinable. Through the aid of the one, three, and five point charts, one may be reasonably certain of the shorter immediate swings and the more profitable intermediate trend moves, as well as the main broad swings of the bull and bear market cycles - the Capital Movement Trend.
We can visualize at a glance, through the aids afforded by this Method, namely, the one, three, and five point charts, the broad zones of accumulation and distribution in the main swings, as well as the closer areas of supply and demand of the narrower and more speculative intermediate trend moves. Our data shows, at a glance, the moves by important areas, by months, by days, by the all important dividend periods, by seasonal influences, and by main business cycle influences. It also shows the results of speculative influences, as well as the effects of long range investment buying and selling.
Examine now Chart Figure 3.1. This is an illustration of a hypothetical move from a start and low of 50, to a high of 55, and a close at 54. Here we illustrate a one day move which by other methods would not permit of technical analysis, yet by the Point and Figure Method, we are given two possible price paths, each of which would connote a different technical condition.
Fig 3.1 One point charts. Click the picture to open larger version. Click here to open in new window.
Note the upper half of the illustration, which we diagnose as bearish. Study carefully the three separate and distinct methods by which data may be recorded when using this Method. The first plan is recording by figures. Trace the move, 50, 51, 50, 51, 52, 51, 52, 53, 52, 53, 52, 51, 52, 53, 54, 55, 54, 53, 52, 53, to 54, the close. The pattern just to the right of the figure chart is called a trend outline chart and illustrated the same move. On the extreme right you may observe the geometrical chart of the same move. Note now that all of this action may be recorded by one day's market fluctuations in a fairly active issue in normal markets. This illustration is bearish because it indicates stock in supply around the 52, and 53, levels with a temporary push through to 55, near the close.
Now regard the lower half of our illustration Figure 3.1. Trace the move, 50, 51, 52, 53, 52, 53, 54, 55, 54, 53, 54, 55, 54, 55, 54, 53, 54, 55, 54. This move is diagnosed as bullish because it indicates scarcity of offerings below 55, and its ability to hold the advance above 53.
The analysis above is made on the actual movement of the issue as shown. If the immediate previous action was plotted and available for comparison, our diagnosis might change.
Records of fluctuations, upon careful analysis, reveal the manipulation. You have seen in the foregoing paragraph how the action which takes place during any market day is broken up into its important fluctuations, namely, its component parts, in order that we may be able to detect what the manipulators, pool operators, and insiders may be doing with the issue. No method as yet devised will show manipulation as clearly and as surely as a diagram made according to the principles of the Point and Figure Method.
Stock sponsors and operators vary their plans of campaign. Some prefer to depress a stock and make it look very weak, even though it is their aim to mark it up to substantially higher prices. Others, whose tactics are bolder and more open, do not hesitate to bid up the price of a stock very rapidly, taking all blocks offered on the way up, and thus creating a spectacular move. The latter method is daring but very effective, because spectacular moves attract wide public appeal through the aid of board room traders and others who watch tape action, as well as comments in the newspapers which usually follow spectacular moves as they develop on the tape.
When operators resort to such spectacular manipulation, lively tape action excites gossip in board rooms and thus attracts a great following for the issue. No matter what procedure is selected by the insiders in any stock, our Point and Figure charts will reveal the areas in which they are accumulating stock and will, with equal accuracy, show zones of distribution.
Build up your Point and Figure data carefully, using for your purpose either the transactions recorded directly from the tape or the full figure daily changes supplied by the publishers of this book. When you plot all of the full figure fluctuations, you have a true representation of what is taking place in the issue. While Point and Figure charts may be compiled from the financial page quotations of your local newspaper, records thus compiled are not nearly as dependable for forecasting purposes as are those with all of the full figure fluctuations.
The charts built up from authentic data consisting of the actual full figure changes, will always develop patterns in the progression of a move which soon become easy to recognize and classify. A careful study of past performances recorded in the same manner will reveal to the student several important factors which have vital forecasting significance - in that they show the proper points at which to make commitments.
These patterns are created as a result of better buying than selling when the move is in the upward direction, and, likewise, when the move is down, they reflect the reverse - better selling than buying. Since a similar cause is always followed by a like effect, these patterns, as they develop, are generally followed by the same type of subsequent action. As we cannot build a house without some kind of foundation, so a stock cannot advance materially unless accumulation has first taken place. Since accumulation will always register on our charts, it becomes but a matter of careful observation and analysis to be able to recognize a move as it is developing and before it really gets started. In addition, we are able to know the exact point at which the risk may be limited while the profit possibilities are preserved to their fullest possible extent.
These characteristic patterns on our Point and Figure Charts always develop, no matter what the condition of the market may be. It is immaterial whether it be a slow day with a half million shares as the average, or a fast session, with five million shares as the average; our Point and Figure charts will reveal, with accuracy, the technical condition of the price movement as plotted and observed.
Since it is the purpose of all market analysis to determine the balance between the forces of supply and demand, we seek a means of accurately measuring those forces. Whether demand be on the part of the well-informed insiders, stock sponsors, manipulators, or the consensus of opinion; whether it be one or more of the foregoing groups, or whether it result from sufficient outside public participation, it will bring about the same results on our Point and Figure charts. By means of the use of the Point and Figure Method, anyone who will devote sufficient time to the mastery of its principles can place himself in possession of the knowledge that will put him on an equal footing with the influential forces, whether they be insiders or outsiders. No basis for a movement in any stock can be completed without leaving definite indications in its price path together with their logical implications as the action of the stock traces its movements clearly on our Point and Figure Charts.
As a matter of fact, those who apply the principles of this Method and handle their transactions independently are in a better position than members of a syndicate or a pool operation, for reasons later explained. Prices advance or decline because of the operation of the forces of demand and supply. While it is true that major interests, large scale operators, syndicates, and pools can temporarily accelerate or retard a movement, we must, nevertheless, keep in mind that no human force or group can very long obstruct the real trend of the market as it moves, because of influences of general economic cycles.
In the last analysis, all speculative operations, whether undertaken for trading profits or for long term investment capital appreciation, must be in harmony with the main trend of the capital movement cycle, or they will result in grief and loss to those who undertake them. Those who operate with one to five hundred share lots of a stock are in vastly better position than are the large groups who must necessarily employ thousands and perhaps hundreds of thousands of shares in their operation. The small operator can reverse his position quickly, while the large scale operator cannot quickly turn about, by reason of the very size and extent of his commitment and the inability of the market to absorb so vast an amount of stock into the floating supply without breaking the movement wide open and causing a major reversal.
Thus, you see that the use of the principles of this Method is more reliable than inside information. We have actual knowledge of the most potent and vital influence, namely, the actual price changes, which must be considered as the verdict of the market resulting from the consensus of all opinions which influence the issue or commodity in which we are operating.
Adhere to the principle of isolation. Turn a deaf ear to all gossip, rumor, inside tips, and other information. Your Point and Figure Charts are more reliable than any other source of information available.
Our charts reveal, in a condensed form, all that is known to the insiders and unknown to others, about the movement of a stock up to the very last moment. What more can anyone wish to know?
Authentic and reliable inside information must not, and cannot be disclosed. Disclosure may wreck costly plans. When such information is disclosed, it is no longer inside information, and then it is not worth knowing, for it immediately becomes common property and usually develops to be the most costly type of information in Wall Street. It generally leaves you long of stock while the insiders have sold their stock and are out of the market. Remember, the news and information you get is only what the insiders and sponsors wish you to know, and then only after they have profited therefrom.
In recent years, the market has more quickly responded to combined public sentiment. Millions of investors and speculators comprise that public. On occasions, their demands have taken the market completely out of the hands of the insiders. Their inactivity has, at times, upset many well laid plans of some of the best banking and financial brains in the country. When these millions begin to act or show tentative signs of activity, the alert major interests - the sponsors, bankers, pool operators, and insiders - endeavor to anticipate their demands. The insiders and operators can only anticipate and start the move by quickly completing their positions and temporarily taking stock out of the floating supply. This operation is often completed in secrecy during inactive markets, when all offerings are soon absorbed without indications of demand appearing on the tape. Then follows the demand or the beginning of the demand of the outside public. After this buying has commenced, sponsors continue to accelerate the advance in harmony with the trend, buying and selling on balance, so that the value of their position, completed at the lower level, increases, as prices are forced higher. As an illustration, a syndicate operation may own, let us say, 10,000 shares of a certain issue at an average price of $10 per share. As the price begins to advance, the manager of the syndicate buys and sells on balance, yet always holds at least the amount originally accumulated, until the market price of the stock is far above the average cost of his position. At the predetermined higher price level, he begins to sell more than he buys and only buys a sufficient quantity to hold the price of the stock at approximately the level at which he wishes to distribute his inventory, accumulated substantially lower down. These operations are always apparent from the patterns formed by the price changes and portrayed on our Point and Figure Charts. When you possess this information, remember, you, too, may be considered one of the insiders.
Students who take this Method seriously and apply themselves to a better understanding of it are in a more advantageous position than the insiders, since, at the first signs of danger, their smaller positions can be quickly liquidated, enabling them to stand aside while the large scale interests are struggling to complete their campaign.
Again, we wish to emphasize this important fact - stock market trading or investing is a serious business and requires careful study and application. No other business offers similar opportunities for gain as often or as quickly as does the stock market. No other business permits one to limit loss or to insure ultimate success as do your transactions in the market, when you thoroughly understand market technique. Remember, your stock market transactions may be closed out quickly or you may reverse your position or protect it by placing strategic stop loss orders.
In business, it is the major interests who dominate, and the larger the unit, the more efficient can be its management; yet that is not applicable to the stock market. Here, a very large commitment may prevent quick action when speed is essential.
It is well to remember when you hear of inside information that is unsupported by positive confirmation from your Point and Figure Charts that many insiders have, in the past, made serious errors. Testimony before governmental committees has revealed only a few of the grave mistakes made by many well grounded in the fields of finance, economics, and banking. Inside opinion, inside judgment or so-called inside information, may on occasion be very good, but if your transaction is not properly timed, you may be wiped out, notwithstanding the good intentions of your informant.
It is best, at all times, to rely upon logical judgment, the result of conclusions arrived at through a careful analysis of actual facts. It is far more dependable than guesswork, tips, rumors, or so-called inside information. Your full figure changes, your knowledge of their implications, the direction of the trend, and your faith in your own self, is all you need when you employ the principles of the Point and Figure Method.
Inasmuch as market knowledge, by and large, is not an exact science, errors of interpretation cause errors of judgment, and hence faulty conclusions may occur on occasions. The most positive indications may be reversed almost momentarily. Therefore, if in the beginning you err occasionally, do not be discouraged. Profit from your mistakes, note the error carefully and resolve never to commit it again. Bear in mind, as you proceed, that coming events are usually anticipated or discounted by major interests and the insiders. When, in the face of bad news on a particular issue, formations indicative of accumulation develop, despite such adverse news, it is wiser for you to follow the insiders than to pay attention to the news, which may have been deliberately released in order to cause the uninformed to dispose of their stocks at a low level.
The one point figure changes, as they register on your charts, reflect all of the buying and selling. When such price changes have completed the pattern, the picture thus formed is the best sort of inside information, since it may be indicative of an impending up move or down move, as the case may be. When your three point charts confirm the conclusions reached by a study of your one point charts, you will then have corroborative proof, and your judgment is thereupon confirmed. Should the implications of your one point charts be confirmed by the three point and also by the five point charts of the same stock, then you may consider your knowledge absolute and definite, and you must act accordingly. Be ever alert and study at all times. Remember, the patterns which are traced on your charts result from the action of individuals. Your chart discloses the balance of all influences. It tells you what is taking place and when to prepare for the move as well as how to take advantage of that information.
Vital point I - recording full figure changes
Vital point II - only full figure changes
Vital point III - suitable graph paper
Vital point IV - use of horizontal and vertical columns
Vital point V - trend reversals
Vital point VI - only one symbol to a square
Vital point VII - move over diagonally
Vital point VIII - skip no squares
Vital point IX - formation of congestion area
Vital point X - the full fulcrum
Vital point XI - first buying point
Vital point XII - the catapult
Vital point XIII - secondary buying point
Vital point XIV - the semi-catapult
Vital point XV - third buying point
Vital point XVI - watch for distribution
Vital point XVII - trend lines
Vital point XVIII - forecasting the extent of the move
The one point price fluctuations are the starting base of this reliable and time tried Method of anticipating stock price movements. For the purpose of clarifying the basic principles, we reiterate and codify these principles so as to avoid any possibility of doubt or question.
The Vital Points underlying the Point and Figure Method are as follows:
I Record all full figure fluctuations registered on the tape.
II Plot these changes on suitable graph paper through the use of symbols representing the full figure changes.
III Make no record of a transaction unless a flat full figure change has actually been registered.
IV Use horizontal columns for specific price levels and vertical columns for price movements continuing in the same direction.
V When a reversal of the price movement develops, move over to the first right-hand column and plot the subsequent changes of prices.
VI A square already occupied by a symbol cannot again be used to accommodate another.
VII A move to the next right-hand vertical column must be in a diagonal direction, either one square higher or one square lower than the last recorded full figure.
VIII No square may be skipped; the pattern traced must be a continuous joining of squares.
IX Be alert to recognize and observe the formations known as congestion areas.
X Analyze congestion areas in order to properly take advantage of a developing full fulcrum.
XI Make commitment near base of a full fulcrum with a stop just below lowest point of support.
XII Watch for the development of the full catapult point.
XIII Make commitment at the catapult point with a stop close below.
XIV Watch for the development of the semi-catapult.
XV Make commitment at the semi-catapult point with a stop close below.
XVI After an extended advance, be on the alert for first signs of distribution.
XVII Learn the technique of the use of trend lines.
XVIII Study and master the principle of the Count to gauge the extent of future moves.
We have set forth as Vital Point I the fact that we must record all full figure fluctuations which have registered on the tape. Many persons, after a casual study of the Point and Figure Method, may reach the conclusion that Point and Figure Charts prepared from newspaper data, that is the opening, the high, the low, and the close which are published daily in financial sections of newspapers, are sufficient from which to gather the full figure changes necessary to prepare our one point charts. However, this is not the case. One is not able to obtain all of the full figure changes from newspaper quotations. All full figure changes are necessary because only by recording all of them are we able to develop the proper congestion areas, which, in turn, show full fulcrums and subsequent catapult and semicatapult formations.
There is little advantage to the study and use of this Method unless you make records of all full figure fluctuations. Furthermore, it is absolutely essential to record all of the full figure changes if we are to depend upon the count method for the purpose of anticipating the extent and probable culminating point of the next move. The technical terms used herein are more fully explained in subsequent chapters of this work.
While it may be truthfully stated that some of the low priced stocks do not fluctuate a full point during the day, and, therefore, the needed data could be obtained from the newspaper, it must be emphasized that even though we be interested in a low priced stock which does not fluctuate actively during a trading day, we must plot the movement of the active stocks in order to get the pulse of the market and thus be able to judge the trend and turning points. Even in low priced stocks, it is difficult to get an accurate analysis of all full figure changes unless one has access to the tape so as to know whether the high or low was first established and their exact relationship to the close.
No transaction is recorded on our charts unless it be a flat, full figure change to the flat full figure above or below the last recorded price. A stock may fluctuate seven-eighths points above its last recorded figure, and seven-eighths points below, giving it a total fluctuating band of one and seven-eighths points, before we enter a new change on our graphic records.
Graphs or charts, whichever you choose to call them, are absolutely essential to this Method. These condensed pictorial representations of the course of the price movement with its oscillations, its advances and declines, are absolutely essential to a scientific study of stock price movements. Charts may be made on any kind of paper which is suitably ruled for the purpose. We especially recommend Ideal Charting Sheets for Point and Figure Charts, because they have been carefully designed in order to facilitate the preparation of the charts and permit instantaneous analysis after the records have been completed.
The recommended graph paper for use with this Method is laid out in columns of squares vertically and horizontally arranged similar to a checker board. The lines dividing the vertical divisions are all of uniform thickness. These vertical columns are used for containing the price movement as they continue in the same direction. The horizontal columns of squares are used to represent specific price levels. The lines dividing the horizontal columns vary in their thickness, for we accentuate the columns for the "5' s" and heavily accentuate the columns for the "10's." The plan for accentuating the "5" and "10" squares is very helpful for swift recording and quick analysis. In addition, this especially designed paper has silhouetted figures representing the "10's" and "5's" which facilitate quick placement of these particular price levels on the page.
Vertical columns are used to include the price movements in one direction, up or down, until a reversal develops. When a reversal does develop and we require a symbol to be placed in a square that is already occupied, it is necessary for us to move over to the next immediate adjoining right-hand column. After the first figure is recorded in a new column, we may proceed either upward or downward from that point, but not both. We must be especially careful to note that in every case we must have more than one symbol in a vertical column.
Since no square can be used twice, it is essential that upon reversal of the trend of the stock price movement we move over to the next right-hand column.
Fig 4.1 XYZ: one point chart
Each reversal in trend which calls for an "X" to be placed in a square already occupied requires that we move over to the next right-hand column. In cases where a reversal requires only a one point change, after which the trend is again established in the previous direction, it is not necessary to move over to the next column, for the change in trend would require a plotting in a square above or below the first one used in the new column. This square, above or below, being empty, we proceed to plot our next symbols. Thus, you will see that in no case can we have only one "X" in a vertical column.
To cite an example, let us analyze the move in XYZ, Figure 4.1. We start plotting the action of this stock at full figure 34, and indicate an upward move to full figure 36. After 36, a reversal to 35 is required, but since the 35 square is already occupied, we move over diagonally, (never horizontally) to the next right hand vertical column. Now the up move is again established and we continue in the same column plotting our symbols above the 5, first figure recorded in the new vertical column group.
A similar situation develops on the reaction from 38, back to 37, from the second column in use to the third column. Another like example occurs on the one point reaction from the first full figure 40, down to the second 39. Now we come to a difference which develops after the stock rallies from 39, to 40. A sharp subsequent reaction develops and carries back down to 35. Here you see how in one instance a one point change moves over to the first right-hand column, while another one point change continues in the same column with subsequent changes again moving over to the next right-hand column.
This is one of the most important principles to be carefully observed in preparing your Point and Figure Charts. Study it carefully and know it thoroughly before you proceed with the work. Unless you thoroughly understand the principles of making these important one point records, you cannot hope to correctly analyze formations which are developed. You cannot hope to arrive at proper and reliable conclusions if you base analysis and deductions on incorrectly prepared data.
This point needs very little further explanation, for it is carefully indicated for you on illustrations throughout the book and fully detailed in our previous paragraph.
In the progression of symbols across our graph paper, no square may be skipped. The pattern traced must be a continuous joining of squares of those above, below or adjacent to the diagonal corners. It is only through the proper development of the price path patterns that the important zones of accumulation and distribution will become recognizable. Moreover, trend lines cannot be accurately plotted unless the patterns are likewise accurate and symmetrical.
The most important pattern that will develop on your charts is that which is known as the congestion area. It represents what is technically known as a trading range and shows the struggle between the forces of supply and demand, either at the bottom of the move where accumulation is being completed or at the top of the move where distribution is taking place. At intervening points on the rallies and declines, congestion areas of minor significance form as a result of temporary consolidation. You will soon learn to recognize the importance of the several different types of congestion areas which are formed on your charts.
The most important congestion area to form on your charts will be the full fulcrum. A full fulcrum congestion area develops after an extended down move when the forces of demand overcome the forces of supply and a base is formed, followed by two or more attempts to rally. The first indication of strength occurs after accumulation begins at the bottom, when a sharp upmove develops and subsequently fails with a recession to the previous support point or to a point slightly above the previous support level. Here, after a little backing and filling, the stock develops technical strength and a new rally carries it higher than the last previous high point, at which point, a full catapult develops.
When you are sure that a full fulcrum is in the process of formation, it is wise to make a commitment as near to the base of the congestion area as is possible, with a stop placed just below the lowest point of support. This is the best place to establish your long position, for here you have the opportunity of gaining the greatest number of points advance with the least possible risk, limited through the employment of a "stop order."
The second important place to establish your long position "on stop" is the full catapult point. The law of probability strongly points to the fact that you will quickly see profits after establishing your position at this point. The true full catapult which develops after a full fulcrum has been completed, normally shows from 3 to 6 points profit before a technical correction registers a paper loss on your position. The "stop" used to protect this long position should be placed one point below half way between the low of the base in the fulcrum and the full catapult point.
Never fail to take advantage of every full catapult as it develops on your chart. Occasionally you may err and suffer temporary paper loss, but in the vast majority of cases, the full catapult point always develops quick profits for a position established there, especially at the inception of an intermediate or main uptrend following a protracted period of declining prices.
The semi-catapult is somewhat similar to the full catapult with the exception that it develops during the advance. After a stock moves off the base known as a full fulcrum and an extended move is in progress, it hesitates and forms temporary congestion areas on the way up. These small congestion areas, usually resulting from minor technical reactions during the advance, create semi-catapult positions as soon as the strength in the stock registers a new high price over the high previously established before the technical reaction.
Make a long commitment at the semi-catapult point each time it develops. Protect this position with a "stop order" placed just below the lowest point established on the technical reaction preceding the semi-catapult figure. You may occasionally lose one or more of these positions and suffer the loss of a point or two between the semi-catapult price and your stop order. However, your losses will be limited while your chances for profits are far in excess of the probability of loss. Profits will accrue to this position in more than six out of ten times established, which profits should be far in excess of losses, especially if the "stop order" suggestion is followed.
After an extended advance, be on the alert for the first signs of distribution. A trading range or congestion area which is built up after a sharp advance in price will be the point for you to watch for first signs of distribution. Use a "stop order" if you are in doubt; or sell on strength soon after you have recognized the beginning of distribution. Technical aids for determining signs of distribution will be found in Volume 2 entitled Advanced Theory and Practice of the Point and Figure Method.
Trend lines are helpful technical aids to use in conjunction with your Point and Figure Chart. The technique of the use of trend lines is fully described in the advanced book prepared for students who have already mastered the principles outlined in this book.
The "count" principle of gauging the extent of future movements can be applied by those who have thoroughly mastered the elementary technique of the Point and Figure Method. Through the use of certain well established scientific principIes, your Point and Figure Charts will show the probable culmination point of the next move. The system of the "count" is highly technical in its character and fully described in the Advanced Theory of this Method.
The ticker tape
Source of all data
Daily full figure fluctuations available
Method ideal for those at distant points
Application of the data
How to prepare and collate the needed data
Proper graph paper helpful
Arrange charts orderly
How to select the issues to record
Clarifying the use of the symbols
Moving to next vertical column
Use of symbol "0"
One cardinal principle
Gaps are not recorded
How the gap occurs
Plotting the gap
The one point chart
The three point and five point charts
Condensing the one point moves
Other helpful aids
The method substitutes for tape reading
Trend outline and geometrical charts
The proper issues to chart
Commodity price movements
We have made clear to you the fact that this time tried Method depends for its accuracy upon a radical and entirely different principle. Price changes, that is the fluctuations in the price of a stock, are more important as the basis upon which to judge its technical condition than are either volume or price range. Price range is the zone between the high and the low which the stock registers each day. A carefully compiled transcription of these price changes will point the way to more consistent and greater profits, with less guesswork and more confidence in your market commitments.
Before we begin to make the chart, it is most important that we obtain the exact price changes in the order in which they occur, and that we be certain of the source of our data. It is vital and most important to the proper application of this Method that we obtain all of the price changes and plot them all. The most vital signals given by this Method are those occurring in the trading ranges, the congestion areas, either at the termination of moves at bottoms and tops, or in the consolidation areas, during the advance or decline.
A trading range is the zone in which a stock backs and fills, i.e. fluctuates above the level of support where sufficient buying is encountered to absorb all offerings and the resistance level above where the demand is unable to absorb the supply. A trading range is sometimes called a "line movement" especially when it is used to describe this action on the part of a market index. In the latter case it shows the base, that level at which sufficient capital is available and desirous of being exchanged for stock, and the resistance level above where the holders of stock desire to exchange their equities for cash.
It, therefore, becomes evident and is of vital importance that all fluctuations be obtained from reliable sources and that they be carefully recorded in the order in which they occur.
Many years ago, Stock Exchange authorities recognized the importance of creating and preserving actual records of all transactions as they occur on the floor of the Stock Exchange. It was then that the ticker tape, as we know it today, was conceived. In the beginning, the records were crude, but as the market broadened in the number of corporate issues traded and this country grew in wealth and importance, the ticker became more highly developed, so that now it is capable of high speed, and the price fluctuations are printed almost as quickly as they occur. It is only on rare occasions that the new, high speed ticker lags, a few minutes at most, behind the actual transactions.
The ticker tape is the official Stock Exchange record of all transactions, and it automatically becomes the source of all data for this or any other method of anticipating stock price movements. Whether you are guided by vertical line bar charts, by moving averages, by statistical information, business conditions, or by the actual technical condition of the stock itself, the source of all information as to the price, the range, the daily closing, daily, weekly, monthly, or yearly, high and low prices, or actual price fluctuations, the ticker tape is the original source of all information. All errors which occur in the recording of the transactions effected on the floor of the New York Stock Exchange are quickly corrected on the tape, sometimes within a minute or two after the error occurs. The ticker tape, therefore, is considered the very best source from which to get the price fluctuations so vitally necessary to the use of the Point and Figure Method.
It is not necessary for you to be in your broker's office in order to procure all of the full figure fluctuations. The publishers of this book provide that service, and it is published daily. In order to insure the accuracy of the information, they have a trained and skilled staff of men who read closely all transactions on the ticker tape.
Each morning, the previous day's changes are carefully checked against data supplied by the Stock Exchange blue sheet and the three most reliable daily financial publications. Errors, if any occur, are carefully noted by the service on the succeeding day in a special errata column.
In the less volatile issues it is possible to approximate the full figure changes from the stock market quotations as published in your daily newspaper. Price fluctuations compiled from newspaper openings, highs, lows, and closes, are not nearly as dependable as the information garnered directly from the tape. In one case, you are assured of all full figure fluctuations, while in the other, a great number of full point changes may be missed. This is vital and important because as you proceed with your work, you will soon realize that complete campaigns of accumulation and distribution can be effectuated in one, two or three market days. As a general rule, Point and Figure Charts compiled from newspaper quotations will rarely show a complete fulcrum, catapult or semi-catapult formation. These formations will develop when you plot all of the full figure fluctuations. Just as a house cannot be built unless a foundation or base is first laid, so a stock cannot rally to any degree, as a general rule, without first creating a congestion area or base from which to advance. Therefore, you must realize that in order to have fullest advantage from your knowledge of the Point and Figure Method it is absolutely essential that you record all of the full figure fluctuations.
For students and observers at distant points, this Method offers a splendid opportunity for observation and study. Even though your "Full Figure Daily Data" may be three or four days late in arriving, your charts will always tell the story in ample time for you to have fullest advantage of moves as they develop. If you are a great distance from New York City and cannot get the accurate full figure changes, we suggest the following procedure. Obtain from your brokerage office, customers man or daily newspaper, your tentative full figure fluctuations, and enter them on your charts by making pencil dots in the squares representing the temporary and estimated changes. A day or two later when you receive your accurate full figure changes, carry forward your chart in ink. Thus, you will have the opportunity of being right up to the minute on the few stocks in which you may have a commitment, and when authentic figures arrive, you are assured of having the correct changes for inking in your graphic records for future reference and study.
After you are certain that you are obtaining all of the authentic full figure fluctuations, it is well for you to form the habit of recording the changes each day. It is best to maintain charts of at least fifty, and if possible, one hundred active stocks, as well as of the following averages, namely, the Dow Jones Industrials, the Dow Jones Rails, the Dow Jones Utilities and the New York Herald Tribune Index of 100 Stocks.
A one half point chart compiled from figures representing the half hourly running line of the Dow Jones Industrial Averages is also very informative of the nearby minor swings. Elsewhere in the book, we supply full detailed explanations of this half point, half hourly running line index.
For the sake of emphasis and clarity and in order to give the student a proper start, we describe, hereunder, the different types of charts which may be built up from the basic data, namely, the one point figure changes.
It is of vital importance that you keep all the needed data in a uniform, neat, and compact arrangement. The authors have devoted serious thought to this problem and the publishers have designed a series of special charting papers which are ideal for the purpose.
We recommend and use, exclusively, "Ideal" charting sheets #5001, printed on white paper, for our one point charts; #5003, printed on buff paper, for our three point charts; and #5005, printed on blue tinted paper for our five point charts. No. 5001.5, our half point paper, is especially recommended for fractional Point and Figure Charts. Nos. 5001, 5003, and 5005, are printed on good quality rag stock, 8" x 11, and are perforated for the conventional three-ring binder. These sheets are convenient to inspect, easy to remove, and ideal for the purpose of study and comparison. The ruling, especially designed, presents a simple arrangement for the digit, cyphers and full figure fives.
The sheet is so laid out that it may be read at a glance with the minimum probability of error. The price level is quickly realized, so that in going through your binders of charts, your attention can be concentrated on a study of technical conditions rather than on irrelevant details.
All of the charts reproduced in this book were drafted on these special "Ideal" charting sheets. The sheets are printed in a special color of ink which permits you to make your charts in pencil or in ink. When using pencil, the special color of the background graph lines permits the pattern to stand out in contrast to that background, even though you use a hard #3 pencil, which permits the plotting to be made without smudging, as is sometimes the case when a softer pencil is used.
As you progress with your work, you will soon be able to keep a graphic record of the movements of 100 stocks and five averages within the one half hour period.
The charts kept in your loose leaf binder should be segregated into one, three, and five point groups. Since the sheets are printed on different colored paper stock, one may easily differentiate them and quickly select the desired chart. The arrangements within the binder may be altered in accordance with your personal preference. We have found it more convenient to group the charts in alphabetical order according to the name of the stock. In this way, comparisons and daily changes are made quickly and easily.
One need not feel that the pressure of other affairs will prevent one from mastering this Method. Primary records, the one and three point charts, can be kept and maintained by any clerk or stenographer. Any intelligent assistant, after a little preliminary study of the principles of this Method, can keep all the needed data and pass on the finished work for study and analysis.
In selecting your group of stocks, it is well to include a minimum of fifty of the most actively traded issues. Whether or not you intend to trade in any or all of these stocks is of no consequence. In addition to the individual issues which it is important for you to keep, it is wise to record the movements of at least three or four of the important popular averages. We suggest the Dow Jones 30 Industrials, the Dow Jones 20 Rails, the Dow Jones 20 Utilities and the New York Herald Tribune Averages. The Dow Jones Averages are shown and quoted wherever American stocks are traded in. The Herald Tribune Average is a weighted index of 100 stocks and a better, truer, and more ideal cross section of the market as a whole. It is less volatile and more dependable due to the fact that it is not easily manipulated.
In addition to the four indexes suggested above, your authors keep and observe a one half point chart of the Dow Jones 30 Industrials, calculated on a half hourly interval. The running line half point half hourly index is a very helpful aid in determining the short swing trends and their terminations. While at first glance it may appear that the necessary data herein before outlined will cause an insurmountable amount of work, nevertheless, we want to call your attention to the important fact that the greatest losses in the stock market were occasioned by hasty judgment, want of incentives, and lack of knowledge of actual market action.
Investment and trading is a serious matter. If you desire to succeed and take profits from the stock market, you must expect to work and study. The work is interesting, the necessary materials inexpensive, and the compensation far in excess of the value of the effort and time consumed.
If you want to have the greatest benefit from your knowledge of this time tried Method, we urge you, once more, to keep and maintain the one point moves in 100 stocks and five averages and the three point moves for the same group. Five point charts, which were mentioned before, are not absolutely essential. They are helpful and can be used for the important indices in order to aid in judging the main trend, and as condensation charts for the more volatile issues.
Recording these price movements, as we have already explained, is done through the use of three simple symbols, "X," "5," and "0." The symbol "X," stands for any full figure which does not include a five or a cypher. Therefore, the symbol "X" may stand for the digits one to four, six to nine, eleven to fourteen, sixteen to nineteen, and so forth and so on. The symbol "5" represents all the multiples of five, such as five, fifteen, twenty-five, thirty-five, etc. Note here, that the figure "5" is used only where the figure ends in five and not when it ends in zero. The symbol "0" is used to represent all multiples of ten in the progression of the price movement, 10, 20, 30, 40, 50, 60, 70, etc. Examine, now, one or more of the charts included in this book in order to get a better and clearer understanding of the use of these symbols. Charts show in clear and simple manner how to use the "X," the "5," and the "0," in their proper places in the price progression and the pattern formation which it creates. Examine Figure 4.1, headed "XYZ: one point chart." Note how we have illustrated the use of all three of the symbols. The first and lowest "X" represents the full figure 34. The first figure, "5," immediately above the first "X," represents the full figure 35 and indicates a progression in an upward direction from 34, to 35, as the stock moves upward. The "X" above the first single figure "5" stands for 36. This shows a move of two points from full figure 34, to full figure 36, or a move to 36 7/8, which would be the fullest extent of an upward move represented by an "X" in the 36 square. The second full figure "5," indicated in the next right-hand column, again represents the price progression and a reversal of the former trend.
Note, here, one of the most important principles in plotting the price movements by the Point and Figure Method. When the trend direction of a stock changes and the required square is already occupied by a symbol, it is necessary to move over to the next adjacent right-hand column. This is very important and one of the principal stumbling blocks which may give you trouble if you do not thoroughly understand it. The chart of "XYZ" at this point indicates a move in a downward direction, from the previous 36 full figure or 36 and a fraction, to the full figure 35 or 34 and fractions above the flat full figure 34.
After plotting the symbol in the 35 square, the trend again changes, and the price movement progresses in an upward direction. The next full figure required is a 36. Since the 36 square is open, we may plot this by recording our "X" just above the "35" most recently recorded. The move then continues in an upward direction registering 37 and 38, before a reversal takes place. Thereafter, we are required to indicate a downward move to 37 or fractionally lower, and since the 37 square in the column is already occupied, we are required to move over to the first right-hand column. Again the trend changes. Now we require a 38 indication, and the symbol "X" is placed in the square just above the 37 most recently recorded.
The move continues upward, 39, and full figure 40, is registered. Here we have the first opportunity of using the symbol zero. "0," then, is placed in the square above the 39, on the 40 horizontal line. Thereafter, a down move to full figure 39 is recorded and we find it necessary to move over to the next right-hand column, because the 39 square is already occupied. The stock then rallies to 40, and we plot the 40 above the 39 already recorded. A sharp down move follows, and the stock registers full figure 35, before a change in trend takes place. This requires symbols to be placed in the 39, 38, 37, 36, and 35 squares. Since the 39 square is already occupied, we move over one vertical column to the right and indicate the down move to full figure 35. The stock then rallies to 39, requiring symbols in the 36, 37, 38, and 39 squares in the next adjacent right-hand column. Now a one point reversal is recorded, requiring us to move over to the next adjacent vertical right-hand column where we plot an "X" in the 38 square. The stock then rallies sharply, making full figure 44, and we proceed with our recording, placing an "x" in the 39, "0" in the 40 square, "X" in 41, 42, 43, and 44 squares. Now a reversal takes place, and the stock sells off making the full figure 41. Again we are required to move over to the next right-hand column in order that we may record our "X" in the square for 44, and we carry to 43, 42, and 41, terminating the move as indicated. In order to make it clear for you, we have designated the direction of the move by showing a black line superimposed over our symbols on this illustration. Note that we have used the symbol "X" to indicate the prices 34, 36, 37, 38, 39, 41, 42, 43, and 44. The symbol "5" indicates the price 35, and the symbol "0" indicates the price 40, in recording the full figure changes.
When we commence to plot the movement of a stock with the full figure 34, no change is made until either full figure 35 or full figure 33 is registered on the tape. Thus, should the stock go down from 34 to 33.22 no change on our records would be made. Similarly, a move upward to 34.88 would be disregarded. You see, therefore, that a stock may fluctuate less than 1 points without requiring any change on our Point and Figure data.
Fractional fluctuations are disregarded unless a new flat full figure is completed. We urge you to trace carefully, again, the move in XYZ by one point fluctuations as illustrated in Figure 4.1. Note the fact that fractional fluctuations are completely disregarded. A move which fails to record a new flat full figure is considered of no importance and, therefore, not taken into consideration.
Since vertical line bar charts have come into wider vogue, several technicians have laid down certain principles based upon the phenomena known as gaps. Gaps on a bar chart are created as a result of a thin market and occur (1) when the high of a day is lower than the low of the preceding day, and (2) when the low of a day is higher than the high of the succeeding day. Thus, you see, one gap is created by strength which leaves an opening between the low of the new day and the high of the previous day, and the other by weakness, which leaves a gap between the low of the preceding day and the high point made after the weakness developed.
In vertical line technique, commentators have noted that gaps created by a thin or unusual market are, as a rule and in the majority of instances, closed over sooner or later by subsequent market action. The principle of gaps and their subsequent closings is not to be relied upon in all instances. While it is customary for gaps to close shortly after they are left by market action, it is not a fixed rule, and cannot be thoroughly relied upon. Gaps exist in many issues, both above and below present market action. In rare cases, some take years before subsequent action will close the gap. The Point and Figure Method completely disregards the gap phenomenon and its theory. Since we are interested in price fluctuations and the recorded trail of the price path, the mere fact that no transaction takes place at any particular point in that path is of little consequence and is not taken into consideration.
Let us illustrate and show you an actual example of how the Point and Figure Method provides for gaps in the price track of a price movement. Let us assume, for instance, in XYZ, that full figure 38, recorded at the bottom of the fifth rally when the stock moves down from full figure 39 to full figure 38, represents the closing at a particular day, and that overnight some bullish news is released unexpectedly and a sudden demand is created for the stock of the XYZ company. A news item such as "XYZ dividend rate raised from $2 to $4" might create such a situation. Let us suppose that some trader wishes to buy one thousand shares quickly believing that subsequent market action will show good profit for a new position established at this point. He places an order with his broker to buy 1,000 shares of XYZ, "at the market." The quotation on XYZ, is: "38.5" bid, offered at 40." The block of shares offered at 40 is only 200, and, therefore, the broker must take 200 at 40, 100 at 40.25, 100 at 40.75, 300 at 41, 100 at 41.20, and 200 at 41.75.
This transaction on the tape would have appeared as follows:
With the previous close having been registered at 38, these transactions shown on the tape would require the following changes in our graph:
Following the 38 in the vertical column and above, an "X," would be plotted in 39, even though no transaction appeared between the previous 38 and the opening 40. The next symbol recorded would be the zero in the 40 square, and then the "X" in the 41 square, representing transactions up to and including the 200 shares sold at 41.75.
Subsequent action of XYZ for the rest of the day included a continuation of the strength up to 44.85, followed by a reaction to 41.0 where the stock closed. That action on the tape would be illustrated by a continuation of plotting "X's" in the vertical column up to and including the "X" representing the figure 44, and then the reversal of the trend showing the "X" in 43 moving over to the next right hand column, then 42, and finally 41, where the stock closed.
Thus, you see, in order to develop the proper technique for creating reliable patterns on our Point and Figure Charts, we disregard the theory of gaps since it has no influence on our conclusions.
Since all conclusions and subsequent records are compiled from your one point charts, it is the best policy to keep them with greatest care. One point charts should be made in the simplest manner possible and by means of the "X," "5," and "0", symbols hereinbefore described.
While any square ruled paper may be used for this purpose, it is better to use the specially designed paper which is available for this purpose and which will permit the accurate plotting of trend lines and the quick recognition of the 5 and 10 levels, as well as the full fulcrum, the catapult, and semi-catapult as they develop. In order to get a better and clearer conception of market action, it is advisable also to compile a substantial quota of charts and keep them up to date, since a comparison of the patterns formed on the individual charts will enable you better to judge the important trends and the vital turning points. No matter what your plans may be, whether you trade for the shorter swings or invest for the longer pull, you will require these one point charts. No reliable analysis of technical condition can be made without them.
It is from the one point charts that we are able to recognize zones of accumulation, the beginning of the mark-up, the vital points at which to place long positions, the critical points at which stop orders should be placed, and, finally, indications of distribution.
In addition to these one point charts, we will require, as a check on our work, three point charts of the same stocks and averages which we have plotted by one point moves. Three point charts are a resume of the action and are compiled solely from the moves indicated on your one point records. These three point charts enable you to keep a clear picture of the intermediate swings of most stocks. They give a true basis for analysis of the more volatile issues.
Three point charts eliminate minor technical fluctuations and show the broader congestion areas. In making your three point chart, you must always remember that your one point records must show a move of not less than three points in the opposite direction before it is recorded on your three point condensation chart. For example: We start with the figure 40. Your one point chart must show a move to the figure 43, before any record whatsoever is made on your three point chart. This move from 40, to 43, would be plotted on your three point chart in the same manner as it is plotted on your one point chart. From 43, before we could plot a reversal on the three point chart, your stock must register a reaction to 40, or lower. However, should it react to 42, or 41, no change would be made on the three point chart. Now, in minor technical reactions to 42, or 41, followed by a subsequent rally, which would go above the previous 43, the move would be plotted by one point moves in the same column on your three point chart as the price advances above 43. Let us say, for example, that the stock rallies to 47, without a full three point reversal from 43. The added figures on your three point chart would be 44, 45, 46, and 47. Thus, you see that your three point chart will show a straight run from 40, to 47, with no other indications recorded. Temporary declines of less than three points are ignored on this chart, and continued subsequent advances above the previous high prices, should they occur, are carried forward by one point registrations in the same column. Three point charts are plotted only of trend reversals which are three or more points in extent. In all other respects, your three point charts are made in the same manner as are your one point charts.
The five point charts condense the price changes to moves of five points or more but not less. They are helpful in connection with the indices when prices fluctuate broadly and when they register in the higher price ranges, such as was witnessed in 1929. Five point charts are also very helpful in that they simplify the interpretation of the wider moving highly volatile stocks. Issues which advance or decline thirty to fifty points in a single intermediate market cycle must be plotted by five point moves, since these charts give the most dependable and satisfactory presentation of the technical condition of the issue. Five point charts are also helpful for the determination of the main and long term trends. They condense the time factor and show long term accumulation and distribution, thus indicating the trend or movement of capital as it comes into variable equities - common stocks - near the bottom of a bear market, and as it moves out of variable equities into bonds or other forms of wealth, at or near the top of a bull market. Five point charts are not necessary for all stocks and need only be kept of the highly volatile issues and the market indices.
The technique of preparing five point charts is exactly the same as that of preparing three point charts with the exception that it requires a reversal in trend direction of five or more points before that reversal is plotted. Continuations of direction of trend are plotted by one point moves until a full five point reversal is recorded on your one point chart.
The three types of charts enumerated above may be considered the foundation and scientific keystone upon which this Method is based. In addition, it is sometimes advantageous to make half point charts of complete half point movements in low priced stocks which do not fluctuate sufficiently by full one point moves to give a satisfactory record on one point charts. Furthermore, half point charts are helpful in plotting the Dow Jones Industrial Index on an hourly, as well as on a half hourly basis.
The half point charts are very helpful for many purposes. They permit the exponents of this Method to entirely eliminate from their operations the need for watching the tape. Under present day market conditions, half point charts of individual stocks, as well as half hourly changes, of the Dow Jones Industrial Index comprise a better and far more reliable basis for judgment than can be had from tape reading. Half point and quarter point charts are more sensitive and give an understandable basis for a detailed record which is vastly superior to the memory of any human being.
A running line of the Dow Jones Industrial Index, compiled on a half hourly basis, is very helpful as an aid in determining the narrow swings of the market. The running line index will be fully explained elsewhere in this work. In plotting commodities, it is sometimes helpful to compile your charts on the basis of quarter point moves or half point moves, as the occasion requires. In some instances, when the commodity prices fluctuate in money values as expressed in units and tens, our primary data charts can be made of each tenth penny fluctuation. Since we ignore fractions when making our one point primary charts, we would ignore fractions between the full figure and the half figure in making half point charts. Quarter point charts would be made by ignoring all one-eighth point moves.
We urge you, when making your Point and Figure Charts, to be sure to get all of the fluctuations.
Students and observers who are beginning to recognize the importance of a sound knowledge of stock market technique will find the trend outline and geo- metrical charts exceedingly helpful. Though not absolutely essential in the application of this Method, they are easy to read and very helpful. Geometrical charts are especially helpful since they show the trading range congestion areas and manipulation. They are also of great assistance to those who wish to use "stop orders," for the reason that a clear picture of the trading range limitations is always indicated.
Trend outline charts are made by merely joining the tops and bottoms, the extremes of the moves, with a diagonal line. They are illustrated in Figures 4.1 and 5.1. These charts differ from vertical line charts and are sometimes used by vertical line technicians as a condensation of the conventional vertical line charts. They enable one to eliminate the time factor and show the important swings of prices - the trend of speculation.
The geometrical chart is made by plotting the extremes of moves with horizontal lines and joining these horizontal lines by vertical lines, thus creating a geometrical pattern. (See Figure 5.2.)
Both geometrical and trend outline charts may be superimposed upon your one, three and five point charts by plotting the trend outline or the geometrical
Fig 5.1 XYZ: one point trend outline
Fig 5.2 XYZ: one point geometric
pattern over your symbols either in ink, or in crayon of different color from that which you use for the purpose of recording your basic data.
When preparing a set of charts, it is natural and wise to plot the foremost market leaders. From time to time, market leadership will change. Therefore, as one group or one issue loses its popular investment or speculative following, it will be necessary to start charts on the new leaders. The following issues are suggested, at this time, as a good grouping, and, if carefully compiled and analyzed day by day, will guide the student and observer to a proper and prompt recognition of the vital turning points in the market:
American Sugar Refining
American Tobacco "B"
Case Threshing Machine
New York Central
Standard Oil of N.J.
U.S. Industrial Alcohol
U.S. Steel Western
No two technicians would select or agree upon the same list of leaders; therefore, we leave it to your individual selection to plot and record those issues which suit you best. However, keep a broad group so that the influence of their united action, both from the investment and speculative angles, will guide you in the recognition of important zones of accumulation, the trend of the market, as well as the zones of distribution.
In a subsequent volume, the authors of this book will show in full detail, application of the Point and Figure Method to the analysis of commodity price movements. The Point and Figure Method has been used successfully as an aid in anticipating the future price movements of wheat, cotton, corn, grain, silver, and any other basic commodity dealt in on any Exchange where a free and open market exists and price change fluctuations are carefully and accurately recorded. As the work applying to commodities is more highly technical and more advanced, this subject cannot be discussed now. Those desiring to use the Point and Figure Method for the purpose of anticipating commodity price movements should and must master thoroughly all of the principles explained in this work as well as in the book Advanced Theory and Practice of The Point and Figure Method.
Watch for a fulcrum
The ideal full fulcrum
Down trend a prerequisite to fulcrum formation
Supply equals demand
Advantage of figure charts
The buying points
The broad fulcrum
The recoil fulcrum
The true catapult
The false catapult
Use "stops" to protect position
We have stated that three scientific principles of mechanics known as the fulcrum, catapult, and semi-catapult are important to this Method and form the keystones upon which it is based.
In the science of mechanics, the fulcrum is defined as "the support on which a lever turns and the means by which influence is exerted." Leverage is defined as "the mechanical power gained by using a lever." A lever in mechanics is any rigid bar capable of turning about a fixed point and having counteracting forces applied at two other points.
Since the purpose of all observation and study of stock price movements is the determination of the important points from which the rallies and declines have their inception, the pattern known as the fulcrum must be carefully regarded when it develops on your Point and Figure Chart.
The fulcrum may develop as a base or as a ceiling near the top of the move where it will form in reverse. It invariably forms at the extremes of an intermediate cycle.
As in mechanics, where the principle of leverage is operative through the fulcrum point, so on your Point and Figure Charts, leverage is created when a congestion area forms a fulcrum after an extended move in the price of a stock. As the course of the price path builds up patterns on your Point and Figure Chart, you will begin to notice three types of fulcrums which occur and recur at the vital turning points in the price movement. These patterns repeat themselves very often and with such regularity that you will soon reach the conclusion that no advance or decline of proportions worthwhile anticipating can occur unless the inception of the move arises from one of these three types of fulcrums which we will later describe in detail.
After a base has formed and it develops to be a fulcrum, the leverage there exerted creates a rally of such force and extent that the stock soon reaches the catapult point from which it quickly develops a further sharp upward movement. Therefore, it becomes one of the cardinal principles of this Method to be on the alert and heed carefully the development of a fulcrum formation on your chart. Three types of fulcrums will develop: (a) the ideal fulcrum, (b) the broad fulcrum, (c) the recoil fulcrum.
The ideal full fulcrum always develops at the bottom of secondary culminations and at the top of major swings in new high territory (see Figures 6.1 and 6.2). It may be considered as the head and shoulder formation at the top and the reverse head and shoulder formation at the bottom. It develops as a result of forces, which, when they occur, always create two ideal positions for students of this Method to observe carefully and make long commitments from which quick and substantial profits soon accrue.
Fig 6.1 The ideal fulcrum
Fig 6.2 The ideal fulcrum
The ideal full fulcrum develops after a down trend has been halted and the price path builds up a pattern which moves over in the trend channel from the lower trend line to the upper trend line as a result of a series of rallies and declines. This action builds up a congestion area with a flat base. From this series of minor rallies and declines, two to five points in extent, which halt within a limited range developing a flat base, a sharp quick rally occurs that may result either from short covering or actual buying which creates the sharp run-up because of the absence of offerings overhead. This sharp advance is then usually followed by a temporary corrective decline which is arrested at a point above the low level established before the first run-up. Subsequent to the second series of rallies and declines, another sharp advance develops which must exceed the high point of the previous rally. The second high point, which is a full figure above the previous rally top, then becomes a catapult point.
Once the stock has developed sufficient strength to hurdle the catapult point, it usually and speedily develops a substantial advance to higher levels, and the reverse occurs when this formation appears near the top of an extended advance.
The full fulcrum develops at the point where the center of gravity shows the balancing of the forces of supply and demand.
A down trend channel formed prior to the fulcrum point indicates that the supply of stock exceeds the demand. At the fulcrum point, the forces begin to balance. After the first rally where the reaction holds above the previous base level, equilibrium is regained and a new up trend channel is in process of being established. Here, demand begins to overcome supply, and a catapult point eventually develops. At the catapult point, demand has overcome supply, and the advance to substantially higher levels begins.
Complete fulcrums may develop in the market action of one or two days or possibly may take several weeks. On many occasions, Point and Figure Charts will show this ideal formation developing while conventional vertical line charts show nothing more than a temporary halt in the down trend. And, in reverse, at the top of a move such conventional vertical line charts would show merely a failure to penetrate the previous top, while your Point and Figure Charts would show a complete fulcrum formation in reverse.
Two important buying points are indicated as the fulcrum develops on your chart. One is in the base, with a stop order placed to limit loss from one to three points below, and the second is at the catapult point with a stop placed below the 50 per cent correction level, which must be considered a normal reaction.
The broad fulcrum (see Figure 6.3), which will develop on your charts, requires close observance and careful analysis. It develops as a result of two or more rallies after the base has been formed and will occur after a full catapult has developed but failed to carry through. Broad fulcrums may indicate one of two conditions: either the lack of aggressive sponsorship, i.e. the absence of aggressive buying, or
Fig 6.3 The broad fulcrum
the close balance between the forces of supply and demand. It is well to protect closely a position which has been established in a fulcrum that later develops to be a broad fulcrum. Seek the first opportunity to close out the position by the "stop order" method after the stock has advanced above your cost price.
The recoil fulcrum (see Figure 6.4) develops subsequent to a sharp and direct down move after a base forms with ascending bottoms instead of flat bottoms. This type of base usually develops a symmetrical triangle with the vertex occurring just below the catapult point. You will observe that in the recoil fulcrum a catapult position usually occurs a point or two over the vertex of the triangle. Note, then, that this formation develops as a result of a sharp decline followed by sharply descending tops and sharply ascending bottoms.
Fig 6.4 The recoil fulcrum
The next important principle in the Point and Figure Method is the catapult which develops after the formation known as the full fulcrum. The encyclopedia describes a catapult as "an ancient military engine used for hurling missiles." The word "catapult" is also defined: "to rush suddenly." A catapult point on your Point and Figure Chart is that price from which a sharp rally should develop. A catapult develops directly as the full fulcrum is completed and is that point just above the previous rally top created before the completion of the full fulcrum. Catapults are of two types: (a) the true catapult, (b) the false catapult.
The true catapult (see Figure 6.5) invariably develops profits without registering a reaction which would cause loss to a commitment established at that point. A minor, temporary, technical reaction from the catapult point or one or more points above the catapult position is a normal occurrence, and tolerable allowance should be made for it when establishing your position at the catapult point.
Occasionally, during a period of indecision and uncertainty, near the bottom of a secondary correction or near the top of a major move in a bull market, a new high level above previous highs will be established, and either a false catapult (see Figure 6.6) or semi-catapult develops. When a false catapult develops, we must be on the alert, for a stock which creates false catapults is in the act of changing its technical position. The failure of a catapult to develop profits immediately is an indication that the congestion area immediately preceding, which you may have diagnosed to be a full ideal fulcrum, is developing into a zone of distribution and must be carefully watched lest the previous base level be violated.
In the great majority of instances, your false catapult position will permit you to close out your commitment without loss. A stock which has created a false catapult will, in many instances, come back close to that point so that you can sell out your position with but a fractional loss. This position may be protected with a "stop" below the congestion area or a "stop" just below the 50 percent reaction point after the catapult has been developed. In either case, subsequent strength
Fig 6.5 The true catapult
Fig 6.6 The false catapult
should be used to move up your "stop-order" so that the failure of the position to develop into a true catapult will not cause you serious loss.
In addition to the two important points for establishing commitments, namely: (1) in the base of the full fulcrum, (2) at the full catapult point; there develops a third which is known as a semi-catapult position (see Figures 6.7 and 6.8). The semi-catapult position develops during an advance in stock as a result of a minor, narrow and limited trading range congestion area usually built up on your Point and Figure charts and from which a stock has a minor technical correction. A semi-catapult point, in this instance, develops after a technical setback when the stock rallies and creates a new high above the immediate preceding congestion area top. There are both true and false semi-catapults which develop in the price progression (see Figures 6.7 and 6.8).
The semi-catapult position is the third important point at which to place your commitment. It usually develops profits quickly for you. The proper place for "stop-order" protection on this commitment would be below the low made during the technical correction. After strength develops, the "stop" thus placed below the technical reaction level should be advanced to an "at the flat" position, thereby insuring the commitment against loss.
Fig 6.7 The true semi-catapult
Fig 6.8 The false semi-catapult
The one point chart
Move to next column
Signs of a fulcrum
The three point chart
Determining three point moves
The use of five point charts
For the purpose of giving you a clear understanding of the plan by which the charts are made according to the Point and Figure Method, and illustrating the coordination of the one with the three point or the one with the three and five point charts, we show an hypothetical move in the common stock of the XYZ corporation.
Figure 7.1 is a one point chart illustrating a theoretical move of the common stock of the XYZ corporation. The first full figure change shown on that chart is the symbol "5" recorded at the top of the first vertical column. This indicates that the stock sold at 25 or between 25 and 257/8, both inclusive, on the first day in January.
In order to indicate that this was the first full figure in the month of January, instead of using the symbol "5," we substitute therefore the symbol "J." "J" indicates that this transaction is the first full figure transaction to be recorded in the month of January.
From the level of 25, the stock sells down to 21, or fractionally lower, but not below 20.88 before it rallies. This calls for symbols in the squares representing 24, 23, 22, and 21. From the low on this reaction, the stock rallies and makes 24, or fractionally higher, but not above 24.80, before a reversal is recorded. Therefore, to plot the rally, we put the symbol "X" in the squares for 22, 23 and 24.
Note, here, that the rally requires moving over to the next right-hand column, because the square 22, in which we were to place the symbol "X" was already occupied, and we move over to the second vertical column. We proceed to plot 22, 23 and 24, and then a one point reversal calls for a symbol in the 23 square, which, being already occupied, requires us to move once more to the next right hand column. Moving up, we place a symbol "X" in the 24 square, and the symbol "5" in the 25 square. Then weakness develops which is stopped at 20, or above the flat figure 19. This requires symbols to be placed in the 24, 23, 22, 21, and 20 squares. In the 20 square, we place the symbol "0" as indicated on the chart. From 20, a rally develops to 23 and a fraction, requiring symbols in the 21, 22, and 23 squares. Thereafter, further pressure develops and a reaction during the latter part of the month carries XYZ down to 15. We place symbols in the 22
Fig 7.1 XYZ: one point chart
and 21 squares, a zero in the 20 square, "X's" in the 19, 18, 17 and 16 squares, and since the full figure 15, is registered on the first day of February, we use the symbol "F" to show that the full figure 15, was the first full figure registered in the month of February. A rally then develops to 18, which is plotted as indicated; a reaction to 15, plotted as shown; another rally to 17; a reaction to 15, which is the first full figure change registered in the month of March; a rally to 16; a reaction to 15; and then a sharp short covering rally to 19.
Here we have the first indication that a fulcrum is forming since the congestion area has moved the pattern over to the upper trend channel line. A short covering rally carrying the stock to 19, meets the requirements of our ideal fulcrum formation. After the rally, a sell-off carries the stock back down to 16, rally to 17, reaction to 15, rally to 18, reaction to 16, rally to 17, reaction to 16, rally to 19, reaction to 18, rally to 19, reaction to 18, and then a rally establishing a full catapult position at 20, which promptly carries through to 25. Here develops a minor technical reaction to 23, a rally to 24, reaction to 23 and another rally establishing another full catapult position at 26. The stock now rallies sharply from the full catapult at 26, until it makes a high of 36, for the move. Then there is a reaction to 31, a rally to 35, reaction to 32, a rally to 34, and then a reaction to 27. These moves are clearly illustrated on the one point chart, Figure 7.1, which we ask you to study carefully.
In addition to the symbols, "X," "5," and "0," we use the first letter of each month to show the first whole figure recorded in that month. Dividend payments and ex-dividend dates are registered by plotting a circle to encompass the first full figure registered on or after the ex-dividend date. When the stock sells in a zero square, on or after the ex-dividend date, instead of using a circle to encompass the square, which might complicate matters, we use a dash in the center of the zero symbol used to indicate the multiples of tens on our charts. In addition to indicating dividend payments with the circle and dash, we make a memorandum at the foot of the column to show the amount of the dividend paid, and the date the stock sells ex-dividend. This principle of indicating dividend payments and dates is not illustrated on our theoretical charts, but it will be found on other charts contained in this book.
Examine carefully this one point chart of XYZ which we used to illustrate the move and which we have traced with you. Note the fulcrum formation as well as the full catapult position indicated by arrows.
We shall proceed to show you how a three point condensation chart is compiled from the one point record just completed.
Take the three point chart of XYZ, Figure 7.2, and compare it with the one point chart, Figure 7.1. Let us trace the move. The three point chart starts with the first full figure 25, records the reaction as noted on the one point chart down to 21, as well as the rally to 24. The three point chart disregards the reaction to 23, but
Fig 7.2 XYZ: three point chart
when the rally from 23, to 25, registers 25, the three point chart properly shows the move by adding a 5, above the 24 square already recorded. The next move which is transferred to the three point chart is the reaction down to 20, followed by the rally to 23, and then the reaction down to 15, because each of these moves is three points or more. Since the rally to 18, is three or more full points, we show it on our three point chart and plot the move 16, 17, 18. This is followed by a decline to 15, again, which is also plotted. Then comes a series of minor rallies and declines less than three points in extent which are ignored by our three point technique.
The next move of importance which is plotted on the three point chart is the rally which terminates at the figure 19. Notice that we plot 16, 17, 18, and 19. The reaction from 19, to 16, is also plotted on the three point chart, but the subsequent rally to 17 is disregarded. Where the reaction from 17, to 15, occurs, the fact that the 15, is lower than the 16, plotted on the three point chart causes us to add the 5, below the last 16 recorded. The rally from 15, to 18, being three or more points in extent, is plotted and we add the squares 16, 17, and 18. There follows, then, a decline to 16, a rally to 17, another decline to 16, all of which are disregarded until the subsequent rally to 19. This requires that we put an "X" above the previously recorded 18, and our three point chart now shows a rally from 15, up to 19. The minor rallies and declines of one point from 19, to 18, and up to 19, down to 18, up to 19, again are all disregarded. However, the move from 18, up to 25, is plotted on the three point chart, but the reaction on the one point from 25, down to 23, rally to 24, the next reaction to 23, all are disregarded, and the next move which carries through the catapult point to 36, is plotted.
The decline to 31, is recorded, likewise the rally to 35, also the decline to 32, but the rally to 34, being less than three points, is ignored. The decline which follows carries down to 27, requiring on our three point chart the added figures of the last decline calling for symbols in the 31, 30, 29, 28, and 27 squares.
Thus you have learned that in compiling a three point chart from the moves already recorded on your one point chart, we plot on the three point chart only rallies or declines which are of three or more full points in extent. In order to determine which are the moves to use, we consider the last recorded figure as zero, and count one, two, three. If the move carries to the third square or further, we record it. If it is less than three full figures away from the previous point recorded, it is ignored. Notice, also, a move which carries beyond the previous recorded point in the same direction is carried forward when a further move of one point or more past the previous high or low price is registered on the one point chart.
The principle involved is as follows:
Record all moves of three or more points in extent. Disregard reactions or reversals of less than three points. Continue the previous recorded direction by one point plottings as soon as the price exceeds the previous low or high.
Three point charts, in addition to their function of general condensation, form the basis for analysis of the more volatile, highly speculative, medium and high priced issues, and for the broader swings of the market. Three point charts also show the worthwhile intermediate trend swings, because they eliminate all minor technical corrections.
Five point charts are used to indicate broad zones of accumulation and distribution in the main trend when plotting the market indices, and are used as basic condensation charts for the more volatile issues which move 10, 20, or 30 points in a single speculative cycle. Five point charts condense the time factor and show long term accumulation and distribution, and are invaluable guides to the Capital Movement Trends.
Turn, now, to Figure 7.3, five point chart of "XYZ" Notice, here, that we plot from the one point data only those moves which are of 5 or more points extent. A stock must rally or decline to the fifth from the last recorded square before our five point chart records a reversal. Nevertheless, a continuation of the move in the already plotted direction is recorded by one point additions until a full five point reversal occurs. In making five point charts, we determine whether or not the move is plotted by starting to count zero at the last recorded square, then, if the move is to or beyond the fifth square, it is plotted.
Compare your five point chart of XYZ, Figure 7.3, with your one point chart, Figure 7.1, and note how this Method provided a highly efficient condensation of the time factor.
Fig 7.3 XYZ: five point chart
The price path characteristics
Patterns of the leaders duplicated in the secondary issues
Solid formations give confidence
Watch for changes in activity
Strong and weak technical position
Weak technical position
Gauging the length and culmination of the moves
Coordinating your studies
After you have gained a comprehensive understanding of the Method and the technique of making the charts, the next step is to study the formations as they develop, and then to classify and analyze them. It is important to know whether a stock is under accumulation in a strong technical position, under distribution in a weak technical position, or merely in an indeterminate neutral position.
In studying the movements of stocks, it is well to have in mind the old saying, "Stocks must fluctuate." Price paths on your one point charts will develop patterns that reflect the peculiar characteristics of each stock. You will begin to observe that a given advance in a certain issue is usually followed by a definite type of technical correction. You will be amazed to observe the harmonious rhythm with which certain types of issues advance or decline, and which generally repeat themselves in the price progression path. While some stocks move harmoniously, other issues are very erratic with sharp advances followed by equally sharp declines, and thus complete their technical correction.
You will note, again and again, that the key issue in any group develops its characteristic pattern, which is usually duplicated by the secondary issues in the same group. A catapult developing in the leader of the group one day will more than likely be followed by a similar formation in the secondary issues soon thereafter. Study carefully the number of points advance and the correction area which follows. Learn whether the correction area is a reaction of 50 or more per cent of the advance or a congestion area in which the stock fluctuates back and forth while it is consolidating the move. The first correction which is greater in proportion to the last advance than the previous corrections which occurred during the advance is the first sign of distribution. Watch carefully for the first more than normal reaction.
During an advance, we prefer to see fairly solid congestion areas after each markup. This indicates each stage of the advance to be well consolidated before the next up move develops. When the progression of the move proceeds with only normal and minor technical reactions, it is an indication that the technical condition of the stock continues strong. If the formations are irregular and confusing, with no uniformity of pattern, we suggest caution. It is an indication of conflict and uncertainty. Such formations, during a major advance, give rise to hollow spaces similar to air chambers beneath the congestion points. These occur as the technical corrections over-extend themselves and create intervening blank spaces in the form of arched ellipses, semi-circles or irregular hollow patterns. Such formations are usually advance warnings of stubborn resistance to the advance and indicate supply meeting demand at the higher levels, with a strong possibility of a change of trend forthcoming. This indication developing on the three point chart is particularly indicative of the imminence of a reversal in trend.
You will observe from your charts that stocks fluctuate narrowly during periods of major accumulation. Soon thereafter, activity, sharp advances and equally sharp technical declines follow. This is usually a sign of the beginning of an extended move. Watch carefully for it. When a stock alters its most recent fluctuating habits, it is wise to be on the alert, for it is a sign of either accumulation or distribution.
The technical position of a stock or the market, as represented by an index, is strong when demand exceeds supply. This condition develops after a period of accumulation which has followed a major decline. A strong technical condition also exists after a mark up followed by a congestion area which develops to be consolidation.
When stock is purchased and taken out of the floating supply, technical condition is very strong. As a stock develops a strong technical position, the one point charts should show an extended line of work in the congestion area, either with a well formed, fairly solid, flat base, or a series of bases like a descending stairway, the bottom base containing the greatest number of squares along the support line. This type of base occurs very often. An exceedingly strong base develops after a sharp decline when each successive rally and decline builds up a triangle with its vertex to the right. When this formation develops to be accumulation, an extremely strong technical position exists.
A weak technical position develops after a series of extended advances which are uncorrected by congestion areas of consolidation. As the move progresses, the advances are not as vigorous as the early ones, and soon the ascending move begins to give way to a series of confused and halting patterns created by the churning motion near the top, which you will recognize as distribution. This formation occurs when supply begins to overcome demand.
At this point, it is important to check against your three point charts in order to observe the consolidated moves and to judge whether or not a real ceiling, which is apt to precede a drastic reversal, has been formed. Should this formation near the top of an extended move begin to develop reactions which leave air pockets, arched ellipses and other hollow areas beneath the congestion zone, it is an ominous sign and time to close out the position or to protect it by close stops.
For the more advanced students and technicians, the Point and Figure Method affords a purely mechanical means of judging the length and culmination of future moves. This system, although not absolutely accurate, is extremely helpful in judging the proper moment to close out a position. It is truly mechanical and involves little judgment to make it operative.
This system, an individual characteristic of the Point and Figure Method, is popularly known as "the count" to students and technicians. Because of the fact that it is somewhat involved and requires a lengthy explanation with multitudinous concrete examples and considerable study before it can be understood, it is omitted from this volume and will be found in the more advanced work entitled The Advanced Theory and Practice of the Point and Figure Method, by the same authors.
We have stated that it is vitally important to record the action of the market by plotting the important and popular indices, as well as the half hourly, half point movements of the popular Dow Jones Industrial Index. The conclusions which you will make resulting from the study of the charts of these indices should be used to influence the opinion arrived at from the study of individual issues. It is well to remember that you buy and sell individual stocks; therefore, it is most important for you to make your commitments based upon your analysis of the individual issues, substantiating your judgment through the influences of the averages. Always remember that we buy and sell stocks and not index numbers. You have now completed a full and detailed course on the elementary principles upon which the Point and Figure Method is based. In order that you may get a clearer understanding of how to apply your knowledge of the Method, we will proceed to take you through a complete intermediate trend cycle move of several issues as illustrated in Chapters 9 and 10. In Chapter 11 you will learn how to plot and analyze the half point, half hourly running index lines of the Dow Jones Industrial Averages. In Chapter 12, by aid of the Point and Figure Method five point chart on which are plotted the moves of the New York Times index, we will show you how a knowledge and application of this Method would have avoided drastic losses which many suffered in 1929, when the last bear market had its inception. Lastly, we will take you through the campaign of Atlas Tack, illustrating to you the application of the knowledge you have acquired, and showing how such knowledge and application would have permitted you to buy and sell with the insiders and share in the sensational moves which were completed by the insiders in that campaign.
The full ideal fulcrum
The catapult position
The semi-catapult position
Consolidating the gains
The final mark up
The end of the move - a reverse fulcrum
The short positions
The trend outline charts
The three point figure charts
The five point charts
Examine chart Figure 9.1, which shows the one point moves of U.s. Steel during the primary trend cycle of 1933.
Fig 9.1 U.S. Steel: One point chart (January 1933 - January 1934, page 1)
Figure 9.1, shows all one point moves in U.S. Steel from the first day of January 1933, up to near the close of the month of June of the same year. Charts like this are compiled from the Full Figure Daily Data supplied by the publishers or from the one point moves which you may obtain from actual tape action. In the previous chapters we have shown the correct procedure for the plotting of one point moves. Examine this chart Figure 9.1. Notice the congestion area between the column Marked "A" and the one marked "B." You will recognize this to be an ideal full fulcrum, which meets almost exactly the requirements as laid down in the definition for this type of formation. The first column indicates an up move starting with the first day in January, after which the action proceeds with its backing and filling until the low point was reached, and which was established before the fourth of March, when President Roosevelt was inaugurated. The rally to full figure 33 was created after the bank holiday, when the market opened up sharply and exceptional strength developed. The subsequent correction which carried down to full figure 27, was completed later in March. In April the stock began to develop new strength and a sharp up trend was recorded with ascending bottoms.
Notice that the pattern from the beginning of the year until the column marked "B" indicated the required down trend, the first rally followed by a technical correction which holds above the previous base level and then a succeeding rally which develops a catapult point, both of which are indicative of a trend reversal. Note in column "C" the full figure 34, indicated with an arrow. This is the most important of all signals given by the Point and Figure Method. It is a full true catapult point. Observe that ten points quick profit develops after a position is established at this point. An order placed to "Buy U.S. Steel on stop at 34," would show ten points quick profit without registering even a small paper loss.
The congestion area which begins to register in the column "D" and carries forward to the column "E" is a temporary halting of the up trend. It is the type of congestion area which develops a semi-catapult point. In column "F", full figure 45 develops to be the semi-catapult point and substantial profits accrue to this position without subsequently showing any loss to a position thus established. While the move from 45 was not as spectacular as the one from 34, nevertheless, it developed more than 18 points profit before the end of the move was completed.
Note the one point decline and subsequent rally plotted in column "G." Here is indicated a temporary supply of stock at the 49 level, which is blocking further advance. The stock reacts from 49, to 47, rallies again to 49, and then reacts to 46, in column "H." Column "I" shows good buying around the 46 level because the second decline fails to go lower and creates a double bottom at 46. Thereafter, the stock develops strength, and in column "J," a new semi-catapult develops. A reaction follows, in column "K." In column "L," it goes through to new high ground forming a new semi-catapult at 51. A small reaction then follows and in column "M" a new semi-catapult develops at 52. Now you will begin to notice that in the upper 50 zone the stock is meeting definite resistance. The moves are not nearly as sharp as they were previous to this point, and the progress, though it goes somewhat higher to approximately 65 or 66, is made with great effort and with many rallies and declines. New semi-catapults are developed in column "N" at 55, and in column "0" at 57, when a rally to 58 meets strong resistance and develops a double top, after which the first extensive reaction is witnessed which carries the stock in column "P" back down to the 51 level.
Here a sharp recovery takes place which is plotted in column "Q." Such a sharp recovery from a low of 51, indicates technical strength. The reaction from 58, down to 56, is another bullish implication because it is a normal correction. Then the stock rallies back to 58 making a quadruple top at this point. The subsequent decline to 54, where another double bottom is established, is bullish because it holds substantially above the previously recorded low point at 51. New semi-catapults develop at 59, and at 61.
Figure 9.2 shows the continuation of the move of U.S. Steel which was carried forward from the point left off in Figure 9.1. Notice the congestion area which builds up around 65, and note further that for the first time we have a quintuple top and a failure to carry through the resistance level at 66 and 67. The actual top
Fig 9.2 U.S. Steel: one part chart (January 1933 - January 1934, page 2)
of this move is plotted and indicated by the arrow at 67. Here is the end of the primary bull trend of U.S. Steel in 1933.
From this point forward, the secondary correction commences, and we see between columns "T," and "V," the congestion area known as a ceiling or fulcrum in reverse with its top point plotted in column "U" and the reverse catapult position at 63, indicated by an arrow, in column "U." In column "W" at 56, a reverse semi-catapult position develops, and the profits of a down move quickly accrue. Examine, now, the extended congestion area plotted between the columns "W" and "Z." Here you see an indication of a close balancing of the forces of supply and demand. In column "Y," the failure of the rally to carry further is an indication of developing weakness. Notice the down trend which develops soon thereafter.
In order that you may have an understanding of the application of the one point geometrical chart, we have plotted a part of the one point moves of U.S. Steel by geometrical technique. This is illustrated in Figure 9.3. Examine it carefully and compare it with the one point chart and with vertical line bar charts of the same move. This will give you a clear illustration of the advantage to be gained from the application of the Point and Figure Method to stock price movements.
In Figure 9.4 we show the plotting of a trend outline chart of the three point moves of u.s. Steel. These charts, while not necessary in a technical analysis, are sometimes very helpful to students who will take the time to draw them.
Fig 9.3 U.S. Steel: one point geometric chart (January - August 1933)
Fig 9.4 U.S. Steel: three point trend outline chart (January 1933 - January 1934)
Figure 9.5 is a three point condensation chart compiled from the one point data of Figures 9.1 and 9.2, and shows the moves of U.S. Steel from the beginning of the year 1933, up to the end of September of the same year. Notice how the catapults and the semi-catapults develop on the three point chart and how they confirm the conclusions arrived at through the study of your one point charts. One
Fig 9.5 U.S. Steel: three point chart (January 1933 - January 1934)
should always compile a three point chart for everyone point chart that he keeps. One and three point charts are vital and essential to a proper application of the principles of this Method.
In Figure 9.6 we show the five point moves of U.S.Steel. The five point data is obtained from the one point charts Figures 9.1 and 9.2. Five point charts are very helpful and show the broader zones of accumulation and distribution. They should always be compiled to show the moves of the main indexes and the volatile issues.
When you attempt to establish a long position near the base of a fulcrum, your stop must be placed very close. Your position established at the catapult point must allow for a 50 per cent correction of the last advance. The same is true for the semi-catapult points. Note that the further the move has extended itself from the full fulcrum base, the more dangerous it is to establish a long position. After an extended advance, you run the risk of a more than normal technical correction touching off your stop. Be patient. Before you establish your position wait for the terminations of secondary corrections in a bull market. Analyze your formations carefully; then proceed with confidence as the full fulcrums and catapults develop.
Fig 9.6 U.S. Steel: five point chart (January 1933 - January 1934)
Selecting the fast moving issues
The full fulcrum base
The short positions
One of the most widely known multi-millionaire stock market operators, who lived and prospered at the turn of the last century, used to counsel his friends to buy Western Union Common whenever it was available around $50 a share. Western Union common has a $100 par value and formerly paid an $8 annual dividend. It was considered one of the prime blue chips. In the 1929 bull market, Western Union sold above $270 per share. In 1932, at the bear market low, its price registered $12.375. Hundreds of thousands of shares were turned over at price levels far below $50, which was the level at which the older generation of authorities counseled their friends to buy. It sold at one quarter that price at the bear market low.
In 1933, a remarkable campaign developed in this issue. It began around the end of February, or the beginning of March as shown on the chart, Figure 10.1. The stock was available between $18 and $20 a share for many days during February, March and April. In a very few weeks it advanced sharply and in a spectacular manner from the level of 18, to more than $75 per share. Here you have a move with a possibility of more than 300 per cent profit, since $1,800 invested in 100 shares of this stock would have grown to $7,500 in a short time. Notwithstanding such a tremendous profit percentage, there was nothing about the move which was not clearly indicated on the charts. You too could have had your share of those profits which were made by many who understood the technical condition of this issue. Your one and three point charts indicated the move weeks in advance.
Figure 10.1 is a one point chart of Western Union. Observe that the down move was arrested near the end of February and the beginning of March and how a congestion area base with a flat bottom was built up between full figure 18 and 20. Note the sharp rally in the middle of the fulcrum when the stock advanced to 27, in one sharp, rapid up surge from the low of 18. Here was a sign of technical strength, a 50 per cent advance in the price of that stock within one day's market action. Surely no one could have failed to recognize such a definite signal. Its confirmation was had after the correction which held firmly in a double bottom formation established at 18, near the end of March and the beginning of April.
Fig 10.1 Western Union: one point chart (January - July 1933, page 1)
Here a new base builds up at a somewhat higher level and the formation begins to meet the requirements of the ideal full fulcrum. In column "A," when the stock has advanced to 26, this fulcrum is completed. The arrow in the next adjoining right-hand column pointing at full figure 27 shows the first full catapult position.
Take particular notice of the firm and definite up trend which the issue establishes as it advances from 20, up through the catapult point and establishes another semi-catapult position at 30. This sharp up trend and its angle of inclination is a confirmation of the strength indicated in mid-March and connotes sharp continuation of the up trend soon to come. The advance begins to develop in column "B" from the semi-catapult point at 30. The stock soon rallies sharply to 38.
A new semi-catapult position is developed at full figure 39, in column "C." Then follows a minor technical correction and a rally which establishes a new semicatapult position at full figure 40, shown at the arrow point in column "D." The congestion area terminating with column "D," shows an excellent solid consolidation of the advance with the stock reestablishing a strong technical position and indicating a further sharp up move soon to follow. The rallies and declines between column "D" and column "E" create further consolidation, establish additional strength, and create a new semi-catapult at 44, shown in column "E." Another semi-catapult is shown in column "F," and still another in column "G." Notice how sharply the stock now advances. An additional semi-catapult position is shown at 62 in column "H." Here one must be on guard. The stock has advanced from 18 to 64, shown on Chart Figure 10.1, without a worthwhile technical set-back. Proceed, now, to Chart Figure 10.2. Observe that the correction sets in.
A reverse fulcrum develops with a short position catapult indication at 58. This is indicated with an arrow in column "I." A reverse semi-catapult develops at 54, indicated in column "J." After the down move in column "K," notice the congestion
Fig 10.2 Western Union: one point chart (January - July 1933, page 2)
area that builds up between the columns "K" and "L." This is an ideal full fulcrum, always a sign of developing strength, and an indication of the termination of an intermediate swing. It is always a signal to go long of the stock at the next catapult point. A catapult develops at full figure 53, indicated in column "M." Profits soon accrue as the stock rallies to 57 and a fraction. Some little resistance is met at that point, and the stock makes a double top at 57, after which it sells down to 53. In the zones between columns "M" and "N," one would be justified in being somewhat hesitant and in doubt about the technical position. The formation is a neutral one until a double bottom is established at 52. The decline which establishes the first 52, creates a new low after the 53, previously recorded and is to be considered a cautionary sign. However, when the stock rallies in column "N" and creates a new semi-catapult at 58, we have an indication of new strength developing. Notice the semi-catapult which is built up between column "N" and column "0," with its miniature full fulcrum at the bottom. Again an excellent semi-catapult position is built up at full figure 59, indicated with the arrow in column "0." The stock continues its advance, but meets with some difficulty, however, between the zones of 60 and 63. When it establishes a new low at 59, indicated in column "P" we must be on guard.
Any position now established must be stopped close beneath the low made on the move which was recorded at full figure 64. The zone from column "0," to column "Q" is a congestion area, of the type which sometimes develops to be the culmination of the move. Be on guard, however, when the stock develops a new semi-catapult at 64, in column "Q." It is a sign of strength. Congestion zone between "Q," and "R," is a consolidation of the gain, and a new semi-catapult position is established in column "R" at the 68 point.
From the base at 49 to 50 the stock has again had a 25 point advance when it establishes a semi-catapult position at 74, in column "S." The congestion area to the right of column "S" is a sign of developing weakness. Be on guard and ready to take your profits on further strength or when subsequent weakness reaches your stop order which should be advanced beneath the market as the move progresses upward.
We are sure, that from a study of the one point moves in Western Union you would have been able to detect and take advantage of an exceptional campaign without the aid of tips, rumors or board room gossip. Examine your three point condensation chart Figure 10.3. Notice how readily these two types of charts are
Fig 10.3 Western Union: three point chart (January - July 1933)
used in conjunction with each other. See the indicated buying levels on your one point charts as they develop confirmations on your three point charts. We show them with arrows in columns "A", "B", and "C", in Figure 10.3. Compare them with Figures 10.1 and 10.2. From these charts you will learn that it is not necessary for you to listen to tips or rumors which circulate about the board rooms and are printed in many of your daily financial publications.
Study well and master the principles of this time tried Method and you will always be able to anticipate stock price movements weeks before the tips and rumors filter their way into the board rooms and financial columns.
The half hourly index of the Dow Jones Industrials
The half point half hourly log
Half point technique
Scientific tape reading
Analyzing the half point chart
Ignore rumors and gossip
Elsewhere in the book, we have promised to give you the details and explain the methods used in compiling a running action index line, which is considered a vital aid by most experienced market technicians.
For the purpose of judging the day-to-day minor swings of the market, there is no technical aid as helpful as a one half point figure chart of the half hourly position of the Dow Jones Industrial Index. For the purpose of facilitating the plotting of the action of this running line we have especially designed a one half point chart sheet known as #5001.5. Students of the Method will find this sheet ideal for the purpose. Messrs. Dow Jones and Company have recently inaugurated the policy of publishing the hourly position of their Dow Jones Industrial Index. Since the fall of 1931, your authors have privately compiled this important index at each half hour interval during every trading day. These computations form the basis for this exceedingly helpful half point half hourly index. The data for carrying this chart forward is supplied in the Full Figure Daily Data Service available from the publishers. This most indispensible index represents the fluctuations of the market as it actually moves from point to point during the day. Notice that the maximum high established in the newspapers and the maximum low are disregarded when we use a running action index line. We are concerned only with the fluctuations of the index as it moves in a continuous line throughout the day, and from day to day. The total of the maximum highs of the stocks which comprise the index highs, or the maximum lows which comprise the index lows, does not interest us.
We are concerned only with the relative strength or weakness of the rallies and declines as they develop and with the resultant congestion areas built up as the index line fluctuates during each market session. Of course, knowledge of the maximum high, the maximum low, and the close of each day is helpful in judging the technical position of the market; but more important for the technician is the information which is to be had from starting and maintaining this important half point half hourly running line index of the Dow Jones Industrial averages.
Turn now to Figure 11.1. The half point figure chart plotted here for you represents the technical action of the market, and, as continued on Figure 11.2 shows the action from the beginning of the year 1933, to beyond the top established in July. The chart terminates with the action indicated about the middle of August at the right-hand edge of Figure 11.2.
Observe, here, that half point technique is exactly like your one point technique, the only difference being that the crossing of the half way zone and the full figure zone calls for a new symbol. Thus, a move from 101 to 102.56 would require "X's" in the lower half of the 101 square, in the upper half of the 101 square, in the lower half of the 102 square, and in the upper half of the 102 square, showing that the move had reached the half way point, or beyond. Should the move carry to 102.99, no additional symbol would be needed, but the moment it registers 103, we would be required to put a symbol in the lower half square of the 103 level showing that 103 flat had been reached. We feel confident that you will understand the technique of developing these half point charts, especially so if you are sure of your one point technique.
These valuable charts are very helpful to the board room trader and other who attempt to catch the shorter swings. They are far more reliable than an attempt at tape reading. This half hourly running line index plotted by half points is actually a visualization of the tape itself. It is dependable and helpful. It is far more reliable than trusting to memory or hazarding a guess. We urge upon everyone of our readers to establish and maintain this half hourly log in half point form. It is a formidable tool and invaluable as an aid in recognizing the day-to-day trend of the market. As you proceed to study half point technique and its application to the running action line, you will begin to realize that the vital mechanical principles forming the basis of the Point and Figure Method, namely, the fulcrum, the catapult and the semi-catapult are clearly recognizable in your half point half hourly market log chart. Compile and maintain this chart. Watch the trend lines on it as they develop. Notice the congestion areas at the terminations of the swings as the market moves up or down the trend channel.
Fig 11.1 Dow Jones Industrial Average: half hourly by one half points (January - July 1933, page 1)
Fig 11.2 Dow Jones
Industrial Average: half hourly by one half points (January - July 1933,
These charts are also available as an Excel file here. Figure 11.2 starts where indicated in yellow.
Be on guard after a sharp up surge when resistance to the advance is clearly indicated. Be ready to buy stocks after an extended decline when a congestion area builds up a fulcrum and a catapult develops. Consider the broader trend channels on this index to show you the trend of the market. The closer trend lines in the congestion areas will show you the danger zones after an up surge, and the point at which to liquidate your long position. The important buying levels indicated on this chart are in the bases formed after a down move when a full fulcrum or a catapult develops. Watch closely congested zones. Also, be on the alert to take advantage of the semi-catapult position which may develop in the price progression path of this important technical aid.
If you maintain and study this chart you will soon be able to disregard the advice of your customers man or the board room habitues and the gossip in which they indulge. If, in the face of bad news and pessimism, this important half hourly index builds up a congestion area of accumulation, disregard the bad news, ignore the rumors, establish your long position, and have patience. Likewise, when all is enthusiasm and stock price advances get on to the front pages of our newspapers, your half point chart will either be showing a clear and already effected advance or the building up of a congestion zone. Congestion zones give implications requiring caution. Be ready to liquidate quickly at first signs of a ceiling developing even though the news and all about you are rampantly optimistic.
It is well to remind you, at this time, that you cannot trade in index numbers. The half point half hourly running action index log is but a representation of the market. You must trade in stocks. When your index line is bullish, select the most bullish formations in individual stocks and place your position in those stocks. Use this valuable Half Hourly Log as an aid to reinforce your judgment. From it, analyze daily, the technical position of the market.
Analyzing the campaign in Atlas Tack
Important signal during July break
The first caution signal
Board room observations
The shorts began to cover
Point and Figure analysis
In order that you may have an illustration of how the half point, Point and Figure technique is applied to an individual issue, we shall take you through the recent campaign in Atlas Tack. The sensational advance of this low priced stock which advanced within a few weeks from $1.50 per share to $34.75, attracted the attention of the Stock Exchange authorities and the Attorneys-General of several States.
The Atlas Tack Corporation was first listed on the New York Stock Exchange at the beginning of the last bull market during 1920 or 1921. There are issued and outstanding 98,000 shares of common stock of no par value. The bull market high of 1929 was 177/8. The low of that year was 5. In the period of 1930 and 1931, the high was 81/2, and the low 11/2. The bear market low in 1932 was 1, and the high of that year 37/8. In 1933, the low was 11/2, the high 343/4. In the month of December, 1933, the high was 343/4 and the low 10.
Here was an issue which presented an ideal opportunity for unscrupulous market operators to take advantage of the public. The small outstanding capital stock, with most of the stock closely held, and an extremely small floating supply, permitted easy manipulation.
Turn, now, to the Chart, Figure 12.1. This is a one half point chart showing all the one half point changes in Atlas Tack from the high of the year 1930 to the low of the bear market and up to the high established on a recent date in 1933. Observe the zone between columns A, and D. Here you will see the type of fulcrum which will always develop in low priced stocks when you apply half point technique to their fluctuations. Give particular attention to that formation. Notice the difference between it and the one point fulcrums.
The sell off in column A, from the high of 81/2, was quite sharp, considering the price level. At 11/2, some resistance to the decline was met as the stock was picked up by the insiders. In the zone A, to B, the stock was several years under accumulation with very few transactions being registered on the tape. Little was heard or seen of Atlas Tack during 1932. In the last quarter of the year, during the months of October, November, and December, the stock sold down from 31/2 to the actual low of 13/4, registered near column B. A few transactions were effected
Fig 12.1 Atlas Tack
Corp.: one half point technique (March 1930 - January 1934)
This chart is also available as an Excel file here.
in the month of February, 1933, around the price of 11/2. Later, a few thousand shares changed hands at 13/4, to 2, and in the month of April, we find a few shares changing hands during the first week of that month at $3 per share. During the month of May, the price of the stock advanced from 3 to 31/2 Thus, you see, between the months of October 1932 and the end of April 1933, Atlas Tack had a very thin market while it was being accumulated by the insiders, when 7,500 shares comprised the total transactions. At 4, shown in column B, the stock was on the catapult. This was the first important buying signal.
Things began to happen during the last week of May 1933. It was at this stage, in the zone marked C to D2, that the manipulators begin to take a real interest in the issue. The advance from the bear market low to 101/2 the top of the rally in column D2, is to be considered a normal one for a low priced stock of a company with fairly good prospects of future earnings. The zone from column B, to column C, represents the final stage of accumulation, C, being the June shake-out of the 1933, bull market run-up. In column D1, we find the first semi-catapult occurring at 81/2 in this issue. Another developed at 9, in column D2. These two semi-catapults were buying points.
The action of Atlas Tack from the zone A to E represents a normal bull market action of a low priced issue. Low priced issues always have best percentage advances from a bear market low point. Accumulation was effected in the zones A, to B, during the run-up in column B, and from B to D1. At the point marked E, we consider that the manipulators had completed their line and the stock formed a new semi-catapult at 11, which was another important buying signal. This took place during the month of August while the rest of the market was recovering from the drastic effects of the July break.
In the July break, while the rest of the market lost twenty-five percent of the average price, namely from 110.00 in the Dow Jones Industrial Index to 85.00, a net change of approximately 25 points, Atlas Tack had but a slight sell-off from 101/2 to 91/2, which constituted the technical reaction between columns D2, and E. That was an important and significant signal to the effect that big things were about to happen in Atlas Tack.
The negligible drop in the price of Atlas Tack during the July break was much less than normally would be expected and showed extremely strong sponsorship. To those who observed its action by half point technique of the Point and Figure Method, the next semi-catapult point would have suggested an immediate purchase. Certainly, the fourth buying place, the semi-catapult at 11, would have been the best point at which to go long of this issue. The mark up in the zone column E, to F, was what might be termed "strong arm work." While the averages were still below their July tops, Atlas Tack was in this mark up phase. The ability of this issue to continue its advance and to hold its reactions at less than normal correction levels was indicative of a continuing strong sponsorship, especially when one considers the fact that the price continued to advance persistently during reactionary periods of the market.
The first cautionary signal carne at the zone G. There, when the stock reacted from 281/2 down to 251/2 we had the first sign of a change in the technical structure. However, sponsorship was still apparent in the zone F, to G, and, in fact, it continued until around the columns J and K. Some distribution was going on in the zone G to K. Note, however, that the sponsors were buying the stock on minor reactions and distributing it at the upper levels, they were buying and selling on balance, meanwhile reducing the size of their long position established in the zone A, to D2. A new semi-catapult developed at 29, in column H. After the reaction at G, all stops should have been advanced to a point close below the low established on that sell-off. Subsequent to the semi-catapult at 29, one should have been on guard. Stops should have been advanced close beneath the market. Surely one should not have allowed such an issue to come back more than 2 1/2 to 3 points from its last high. Positions established at 4, at 81/2 at 9, at 11, at 181/2 and at 201/2 all would now have shown substantial profits and should have been closely guarded by stops. Notice, here, that the main trend line "LT" intercepted the work area in column I, when the stock backed and filled in the 30 level. That was the final warning. Stops should have been advanced to just below the price of 30, and, on subsequent strength, moved up close beneath the market. Compare the mark up trend pitch with the pitch of its predecessors. The final mark up trend line, "FM" clearly showed that the insiders had distributed a great part of their stock to the public and were standing aside. The public then held the bulk of the floating supply.
The mark up in column F, when the stock advanced from 18 to 26, occurred on increased volume, and it was there that many board room habitues, customers men, and others were attracted to the performance of Atlas Tack. The churning in the zone between F, and H, represented distribution on balance by the insiders and some short selling on the part of the more experienced board room traders. The mark up in column I, occurred on terrific volume. There was another sign for board room traders. Great turnover in the number of shares of this stock, many transactions in this issue which had theretofore been extremely scarce, and rarely printed on the ticker tape as it unrolled from day to day, were indications to the more informed tape readers and board room observers that the end was close at hand in Atlas Tack. Many began to sell the stock short from column H to column J. This condition is always apparent on Point and Figure Charts when many half point changes are recorded.
In the zone K to L, some board room traders who shorted this issue began to take in their short lines, and the sell off in the stock met temporary support due to short covering. However, the less cautious ones stayed short, for they knew that even at $15 per share the common stock of the Atlas Tack Corporation was still high in price. After the temporary demand on the part of shorts who were covering around 15, was met, further supply carried the stock down to 10, and, in the zone L to M, this issue found a normal level consistent with its actual value and reasonable prospects.
Notice that the zone H, to K, represented a large number of figure changes while little progress was made in the advance of Atlas Tack. This occurred during a period when the balance of the market had shown considerable strength. The opposite technical action occurred during the July break. That was the final signal for students of the Point and Figure Method to close out their positions. Increased volume with lessened progress, and sluggishness in the advance, were all definite signs that the sponsors had unloaded their stock on the uninformed public. It was time to get out of the issue, and, as a matter of fact, to look for the first opportunity where the price broke a previous support level at an inverse catapult or semi-catapult and there go short of this issue. The sell off in Atlas Tack from the actual high of 343/4 to 91/2 was indeed dramatic. On Saturday, December 16, Atlas Tack opened at 331/2 and soon sold down to 321/4. Trading in the issue was temporarily halted. The next sale recorded was 4,800 shares at 25. That day, the stock closed at 215/8, and a few days later declined to the low of 10. Thus, you see that no matter where your stop would have been in Atlas Tack, the positions established at the catapult point or at any of the semi-catapult points before the advance would have netted you $25 per share, a handsome margin of profit from the first position established at 4, the second at 81/2, the third at 91/4, or the fourth at 11. Of course, there is a big difference between $34 per share near the high and $25 per share, the point at which the first block was sold after trading stopped. It is an indication of the danger involved using stop orders in a thin market stock. Nevertheless, it permitted the taking of mighty fine profits for those who took advantage of the signals as they were clearly developed by Point and Figure technique.
Critical culmination points easily detected
The one point chart - the basis for analysis
Interpreting an intricate major culmination
The first temporary top
Semi-catapult point - unusually bullish pattern
Strength carries through objective level
The change over of technical action
The top of the move clearly indicated
Indications of a major culmination
Bear trend technical action
The investor or long term trader
In order to illustrate how the Point and Figure Method will aid you to judge the capital movement trend and the major cycle crucial turning points, we have added Figures 13.1 and 13.2, one point charts of the New York Times Average from June 1929, to the now historical break which occurred in October of that year. Figure 13.3 is a three point condensation chart of the same move and Figure 13.4 is a five point condensation chart. The data used to prepare the three and five point charts was taken from the one point moves as plotted on Figures 13.1 and 13.2.
The four illustrations, Chart Figures 13.1 to 13.4, represent the top zone of the biggest bull market ever witnessed in the entire history of finance. That top represents an important and critical zone in which an ideal test of this Method may be demonstrated. We have stated that the Point and Figure Method provides the means for judging the major as well as minor culminations of price movement trends. We add to this statement that this is the only Method which will always aid you to recognize the turn of the major cycle when the market changes from bull trend to bear trend.
Figures 13.1 and 13.2 depict all of the one point moves of the New York Times Index during the critical period from June 1929, to the break in October of that year. In those few weeks some of the issues on the big board fluctuated over a range of hundreds of points. The market from June, to September, offered exceptional opportunities for profit on the long side and the breaks of September and October duplicated those opportunities on the short side. Not only did this Method clearly show the top and the reversal from bull to bear trend at that time, but it will continue to do so again and again as the price path leaves its tracings for posterity.
The fifty stocks which comprise the index compiled by the New York Times, and which we use for the purpose of illustrating the reversal of the technical action in 1929, were a fair cross section of the market, when it was fluctuating around
Fig 13.1 N.Y. Times Average: one point chart (May - October 1929, page 1)
Fig 13.2 N.Y. Times Average: one point chart (May - October 1929, page 2)
Fig 13.3 N.Y. Times Average: three point chart (May - October 1929)
Fig 13.4 N.Y. Times Average: five point chart (May - October 1929)
the higher zones during the period under consideration. Any of the popular averages could have been used for the same purpose - either the Dow Jones Industrial group, the New York Herald Tribune, or the Standard Statistics group of ninety stocks. Point and Figure Method technique may be applied to the movements of any market composite index. For best results, we suggest that you be sure the index you use is a true representation, a reasonable cross section of the market, that it is fairly accurate and compiled by a responsible organization.
In the Spring and early Summer of 1929, several widely known organizations began suggesting the liquidation of long positions and the establishment of short positions in anticipation of a major trend reversal. The vertical chart formations of the action of some stocks during that time began to appear as though the end was near to hand. You will see from the following discussion that the Point and Figure Method would have prevented such conclusions on the part of those who understood its technique.
We ask you now to turn to Chart Figures 13.1 and 13.2. In Figure 13.1 the zone A, to B, represents a trading area in the month of June which misled many vertical line technicians. We are sure that you will recognize it as a Point and Figure pattern with a bullish implication. The run up from column A to the high at 248, in the middle of the zone was a sharp one, and a reasonable reaction should have been expected to correct so sharp an up move. Therefore, the declines which terminated at 242, are to be considered normal in view of the nature of the previous run up. It is true that the small air pocket which occurred beneath the work area around the figure 245, might have been considered a minor bearish implication, but only so if the reaction would have carried substantially lower, cancelling more than 50 per cent of the previous rally. In the area above column B, however, you will notice a few rallies and declines which began to show important bullish signals.
The bottom at 242, was tested, and the decline stopped at 243. Thereafter, the succeeding decline stopped at 244, and the future rally created a catapult at 247, and a major trend semi-catapult at 249. No student of the Point and Figure Method would have failed to recognize the bullish implications of market action at that time. No one would have sold out long positions or established short ones. The technical action was decidedly bullish and, in addition, the theory of "the Count" applied to the congestion area between A, and B, implied substantially higher prices. The Count method is more fully described in Advanced Theory and Practice of the Point and Figure Method found later in this book.
The congestion area A, to B, with its semi-catapult point at 249, was an unusually bullish pattern. It implied substantially higher prices, and the run up B, to C, followed. This mark up B, to C, was a spectacular run in of the shorts who had established their positions during the Spring and early Summer prior to the zone marked B. Those sharp advances are typical of major operations and in this case they proved to be the means of obtaining front page publicity for the market and an invitation which carried many of the public at large, head over heels into the biggest bull market ever witnessed.
The implications of the congestion area A, to B, suggested that the rally would run to at least 266, or higher, and it is at that zone that you would have had reason to begin to look for a possible top of the bull market.
In the zone 265, to 270, however, the market continued exceedingly strong and no danger sign occurred until the price area 275, to 280, began to develop. From the last starting point, 242, at B, to the temporary top, 280, at C, we have had no correction of consequence. Examine the three and five point charts, Figures 13.3 and 13.4, and notice the sharp trend of the rally B, to C. Active short swing traders, basing their judgment on the one point moves, would have liquidated positions around the 275 zone, side stepping the market until either a correction was witnessed or until the semi-catapult point at 281, was registered. The rally A, to C, required either a congestion area of re-consolidation, or a reaction sufficient to correct so sharp an up swing. The reaction which came was of minor consequence, however, as is shown between columns C, and D. It was clearly indicated at this point from the bullish pattern and the solid formations which were witnessed between C, and D, that a further advance in prices was in prospect.
Observe carefully the zones between D, and E, between E, and F, the final mark up F, to G, the minor correction G, to H, and the false rally H, to I, with its inverted recoil fulcrum. Note the signs of distributions subsequent to the zone marked D. Observe that the highest squares between the work areas are massed solid with the oft repeating sharp declines followed by sharp rallies. These are always signs of the beginning of distribution and the weakening of the technical structure of the market. Stocks in this zone began to come out of the strong boxes, to pass from the hands of the insiders and long term holders into the floating supply and to the inexperienced public who buy at the top of rallies and sell on the declines. Notice that the zone from D, to I, repeats again and again the elongated hollow areas beneath the work zones as the price path pattern progressed slightly higher and moved across our chart. Notice the absence of solid zones of consolidation. Observe that the move was struggling and meeting additional resistance as it worked higher.
Note carefully that patterns which have the form of the character "M," with the congestion work areas at the tops of the "M" loops, when repeated many times in rapid succession, are always to be considered of bearish implication.
On the other hand, patterns which have the form of the character "W," with the congestion work areas at the bottoms of the "W" loops, when repeated many times in rapid succession, carry bullish implications. The one point moves as depicted on the charts, Figures 13.1 and 13.2, show many repetitions of the "M," pattern in the zone D, to I. This, in accordance with the theorem set forth above, implies a weakening technical condition and constitutes an important cautionary signal.
On the three point chart, Figure 13.3 the dips columns E, and F, indicate the beginning of a weakened technical position of the market, but the unusually sharp recoveries imply that the main top and reversal is to come from higher levels. In column I, you will note the reverse of these dips when the list rallied to 311, and quickly backed away. The action that quickly followed confirmed the last inverted catapult which had developed at 296.
Compare the one, three, and five point charts at this point. Notice, on the five point chart, Figure 13.4, that the final mark up trend line "FM," is soon intercepted by the price pattern just above the 300 mark.
The intersection of the price path pattern, by the final mark up trend line "FM," on the five point chart was the all important danger signal, the final caution. That signal was confirmed by the nature of the patterns on the one point chart, from zone D, to zone G. This, together with the failure of a mass zone of consolidation to develop between G, and I, were all to be considered as warnings of the impending reversal. The patterns recorded from column D, to I, constituted a change in the type of technical action and were caution signals for students of this Method to liquidate all long positions and stand aside until the previous rally, A, to H, was fully corrected. The correction could have been effected by either a congestion zone of consolidation or a reaction.
Notice carefully the peculiar and extremely nervous state of the market as was indicated on the one point chart between zones G, and I. Observe the triangles on the one point chart between zones G, and I. Observe the triangles at H, and I. Consider the fact that no consolidation of the final mark up appeared. Consider the inverted fulcrum at G, and the false inverted catapult at 296. Notice that the last push through at I, was accomplished without the previous formation of a firm solid base at 300. Also, consider the inverted catapult point at 292, between columns I, and J. These were all vital and important signals for students of this Method; they clearly indicated the top of the bull market and its impending reversal.
Having reached the conclusions outlined in the foregoing paragraphs that the zones D, to I, represented a change in technical action, no student of this Method could have failed to recognize in the sell off from I, to J, and the rally J, to K, definite signs of an impending bear market and bear trend technical action. The top at I, is a typical inverted recoil fulcrum which you will recall always implies swift action. On the way down in the decline, full figure 303, represents the inverse catapult point. An additional inverse catapult is developed at 298. Certainly the failure of the decline to hold 299, and consolidate above that zone is an exceptional example of the imminence of a big break and an additional confirmation that buying power had been exhausted.
You will remember, that a recoil fulcrum, whether upright or reverse, always connotes a sharp move impending. Therefore, either at 303, or at 298, you would have established short positions, especially so, if you were trading for the shorter swings based on conclusions and analysis of the one point moves as depicted in Figures 13.1 and 13.2.
The longer term trader, although he would have been out of the market, might have waited for further confirmation or an opportunity to analyze subsequent technical action before establishing his short position.
The decline I, to J, which started in September, and terminated temporarily in the beginning of October, was typical bear trend action. The recovery J, to K, was final and definite confirmation that the bull market was finished and the bear trend started. The congestion area which built up after the rally in column J, in the zone around 295 to 300, above the symbol "K" showed definite resistance and plentiful supply of stock for all buyers who wished to take it. The failure of the rally J, to K, to penetrate the main trend was a final confirmation of the bear trend even for the more cautious long term traders who would have been out of the market during the decline I, to J. After the rally J, to K, with its inverse catapult at 289, inverse semi-catapults at 286, and 272, none could have doubted that the bear market was under way.
The change to an up trend
The change to a down trend
By observing the number of full point or half point changes recorded daily, either by individual issues or by a market index, and by studying the technical action throughout the day's trading and its relationship to immediately preceding market action, we are able to judge minor swing turning points.
After a period of decline in a bull market, a turning point from down trend to up trend usually develops in the following manner:
1. The number of full figure changes dries up (lessens) on the declines.
2. The number of full figure changes increases on the rallies.
3. A test of the last established low point follows, which test must hold at a level above the last low or at the same point as the last low. The latter technical action is known as a double bottom, the former as a higher bottom.
4. After the test establishing a higher bottom or a double bottom, the succeeding rally develops sufficient strength to penetrate the preceding rally top.
(Students will note that the foregoing type of technical action exactly meets the requirements of the Point and Figure fulcrum formation.)
After a period of decline, it is customary, during periods of accumulation, for market activity to subside to such a degree that often many days may pass in succession wherein only 20 or 25 issues of the 100 most actively traded will show but one full figure change daily. Students must remember that a limited number of full figure changes after a decline is an indication of an impending turning point. In such a period, one should not feel that the market is inactive, or to use the colloquial expression, "doing nothing." It is at such times that important accumulation is being completed. Changes in trend occur when the half point half hourly index hovers around a given level and builds up a congestion area from the few half point changes which register each day. This is especially indicative of a change over of trend when it occurs at or near one of the trend lines.
After a period of advance in a bull market, a turning point from up trend to down trend usually develops in the following way:
1. The number of full figure changes increases within a congestion area while the rest of the list rallies - buying power is temporarily exhausted as stocks pass into the hands of weak holders.
2. The number of full figure changes increases on the successive declines.
3. A test of the last established high point follows, which test must fail at or lower than the last high point. The former technical action is known as a double top, the latter as a lower top.
4. After the test, the succeeding decline gathers momentum as it goes down and breaks the support point of the last previous decline.
(Students will recognize this to be the type of technical action which meets the requirements of an inverted fulcrum.)
After an advance, it is customary, during periods of distribution, for activity to increase. In such periods, stocks fluctuate with increased numbers of full figure changes but make little further progress or the rate of progress is greatly reduced as the number of fluctuations increase.
Success in every field of endeavor is but the result of assiduous effort towards a definite objective. In order to attain success, we must apply the principles which have aided others. In applying these principles to our own problems, we are, in effect, making the experiences of others our own.
Oft times the progress is slow and discouraging moments arise. When such obstacles do occur, the mettle of the individual is put to test. If he permits discouragements to impede his progress and concludes that he is incapable of accomplishment, he drops by the wayside and is overtaken and passed by those whose tenacity of purpose and determination to succeed is uninfluenced by temporary discouragement. To the successful these obstacles are merely additional incentives.
In the preceding chapters, we have endeavored to teach and to illustrate the basic principles of the Point and Figure Method of anticipating stock price movements. This Method has run the test of time and has not been found wanting. Since a proper assimilation of the principles of this Method and their correct application to market action are the keystones to the mastery and acquisition of a knowledge of a stock market technique which cannot but pay handsome dividends, we urge you to keep the following guides before you at all times:
1. Apply yourself to a serious study of this Method. Ground yourself thoroughly in all of its principles and their application as set forth and illustrated in the text.
2. Apply the acquired knowledge to past as well as present market action. Test and retest your reasoning and conclusions. Money need not be involved at first. Theoretical trades will be found interesting and instructive. They will give you the required familiarity with the proper application of the principles, and thus you will be instilled with that confidence so essential to success.
3. Having acquired a mastery of the principles of this Method, and a knowledge of their correct application, be sure to follow their implications. Have the courage of your convictions, and do not permit yourself to be influenced by outside opinions, rumors, or gossip.
The success achieved and the profits derived from your stock market transactions will be in proportion to the enthusiasm with which you study the principles of this Method and their application, your understanding of the technical action of the stock market, the intelligent application of these principles to your own market operations.