Bearish Catapult

A triple bottom sell signal followed by a lower top and then a double bottom sell signal. It is a bearish pattern.

Bearish Resistance Line

This particular trend line is also called the Downtrend Line or often written as BRL for short, and as the word suggests, a stock (or index or ETF or mutual fund or commodity) that is trading below its Bearish Resistance Line is trending lower and is in what we would consider an overall negative or bearish trend. To draw the BRL, you go to the highest column of X’s on the chart, after a sell signal has been given, and place a mark in the box directly above that highest X. From there you go down and over a box, make another mark, then continue this process until your Bearish Resistance Line has been drawn.

If the given security vehicle is trading below its Bearish Resistance Line, in an overall downtrend, we would tend to restrict positions taken to shorts. Similar to the Bullish Support Line, it is paramount that you monitor whether the security has penetrated its Bearish Resistance Line, as this would signal a change from what had been a negative trend, to a bullish trend; this would then prompt a change from focusing on shorts to one focused on longs.

Bearish Signal Reversed

Series of lower tops and lower bottoms wherein, without a period of accumulation, the stock reverses the pattern with a double top buy signal. To qualify for this pattern, there must be at least seven columns. This is a bullish pattern.

Bearish Triangle

A series of lower tops and higher bottoms occurring at the same time. The chart then comes to a point at which is must break one way or the other. If the breakout is a double bottom, it is considered a bearish triangle pattern. This pattern must be at least 5 columns wide to qualify.

Box Size

Box size is the change in price of a security represented by a 1 box move in a point and figure chart. The box size typically varies depending on the price of a stock. In the DWA Point & Figure methodology, a standardized scaling method for sizing each box is applied. Stocks between 0 and $5 are plotted at $.25 per box. Stocks between $5 and $20 area plotted at $.50 per box. Stocks between $20 and $100 area plotted at 1 point per box. Stocks between $100 and $200 are plotted at $2 points per box. Stocks above $200 are plotted at $4 points per box. These scales can be modified using the Dorsey, Wright SmartChart function to either speed up or slow down a chart.

Bullish Catapult

A triple top buy signal followed by a higher bottom and then a double top buy signal. It is a bullish pattern.

Bullish Percent

The bullish percent is a measure of the percent of stocks in any universe that are on a Point & Figure buy signal. This percentage is plotted on a grid from 0% to 100%. X’s represent that more stocks are going on buy signals and the offensive team is on the field for that market or sector. O’s represent that more stocks are going on sell signals and the defensive team is on the field for that market or sector. The two lines of demarcation on a bullish percent chart are 30% and 70%. The 30% level and below is the "Green Zone" or low risk area. The 70% level and above is the "Red Zone" or high risk area. Focus on your field position and column for an assessment of risk in that particular market. Bullish percents are a measure of risk in the market, not the direction an index should move.

Bullish Signal Reversed

Series of higher tops and higher bottoms wherein, without a period of accumulation, the stock reverses the pattern with a double bottom sell signal. To qualify for this pattern, there must be at least seven columns. This is a bearish pattern.

Bullish Support Line

Similarly known as the Uptrend Line or often referred to in our work as the BSL for short. If the stock (or other investment vehicle) is trading above its Bullish Support Line it is said to be in an overall uptrend. The Bullish Support Line is always a 45-degree line, upward sloping to the right. Drawing this Uptrend Line is very easy – once the first buy signal is given, off the bottom or after a period of accumulation (moving sideways), you then go to the lowest-reaching column of O’s in that pattern on the chart and begin drawing the trend line by placing a mark in the box directly below the lowest O. You then move up and over a box and place a second mark, and repeat this process which will result in an upward sloping 45 degree line – this is your Bullish Support Line. In Point & Figure Charting this will always be same. As a general rule, if the security is trading above its Bullish Support Line, in an overall uptrend, your trades should be limited to long positions. It is also crucial to watch for a violation, or penetration, of the Bullish Support Line, as that would be a sign that the overall trend is changing from positive to negative – or from an uptrend to a downtrend. A violation of the Bullish Support Line is a "call to action".

Bullish Triangle

A series of lower tops and higher bottoms occurring at the same time. The chart then comes to a point at which is must break one way or the other. If the breakout is a double top, it is considered a bullish triangle pattern. This pattern must be at least 5 columns wide to qualify.

Chart Numbers

Numbers in a chart stand for the months of the year. For instance, 1 would signify January, 2 would represent February, 3 for March and so forth. A, B and C are used to denote October, November and December. The numbers at the bottom of the chart note a change from one year to the next - 05 (2005) to 06 (2006). Time is not a consideration in the evaluation of a chart; it is just used as a reference point.

Chart Patterns

In the Point & Figure methodology there are eleven types of patterns, but for all intents and purposes, nine of these patterns are merely derivatives from the two most basic patterns – that of the double top and double bottom.

Charting

A Point & Figure chart is constructed by using the daily high and low prices. A chart can only move one direction a day, continuing in the current column. If the chart cannot continue in the current column, then check for a reversal. A reversal on a Point & Figure chart needs at least 3 boxes. A Point & Figure chart will not necessarily make a movement every day and this differs from a Bar Chart which makes a mark each day. Never in a Point & Figure chart will you see X's in a column of O's or vice versa.

Color Coding X's and O's

Red is used to designate O's that were added to the chart the previous day while Green is used to designate X's that were added to the chart the previous day. Blue X's or O's represent intraday movement.

Double Bottom

A column of O's exceeds the previous column of O's. The simplest of all sell signals and suggests supply is getting stronger.

Double Top

A column of X's exceeds the previous column of X's. The simplest of all buy signals and suggests demand is getting stronger.

ETF

Exchange Traded Funds are a class of equity vehicles commonly referred to as ETFs. ETFs are baskets of equities, similar to mutual funds, that trade much more like stocks. A mutual fund is managed by a portfolio manager and you don’t often know what equities are held, or in what proportions they have been purchased. ETFs, on the other hand, are transparent in the sense that the investor always has access to the holdings within any ETF product. With an ETF the basket of stocks are designed to closely mirror the movement of an index, such as the S&P 500. Unlike mutual funds, ETFs can be purchased and sold throughout the course of a day, stop and limit orders can be placed, they can be sold short, and they may also be margined. There are thousands of ETFs now available, tracking a myriad of different market and sector indices, commodities, and international markets.

Exchange Traded Fund

See "ETF"

Favored Sector Status

Favored Sector Status is a concept we use to gauge the relative health or the potential magnitude of movement within a sector. To get the concept straight, think about the most important longer term attributes you want to see in a stock that you are going to buy. If I were culling down a universe of stocks down to the most technically sound ones, three criteria I would choose would be relative strength signal, relative strength column, and overall trend of the stock. Stocks that are above their bullish support lines, have positive strength signals versus the market and have their relative strength charts in a column of X's, are often the leaders of the market. The Favored Sector concept builds upon these traits to identify those sectors whose members are showing positive technical action versus negative technical action. Four charts are used to determine Favored Sector Status; RSX Chart, RSP Chart, PT Chart, and the Sector Relative Strength chart. For each chart that is in a column of X's (a buy signal for the RSX chart), the sector is awarded a point. If a sector has 3 or 4 points it is considered Favored. An Average sector has 2 points positive and an Un-favored sector only has 1 or 0 points. Focus on those sectors with a Favored status as these groups are most likely to outperform the market.

Fund Score

A rating system that ranges from 0 to 6. The score includes the 5 Basic Attributes that is similar to how we rate Stocks. The score also includes additional parameters, including chart patterns, Moving Averages, Momentum and Percentile Ranking for the fund versus several Market and Peer Groups over several time periods. The Score uses proprietary weightings, but adds up to reflect one-third trend chart attributes and two-thirds Relative Strength attributes. In general, a score of 3 or higher is desirable for buying or holding.

High-Low Index

This index measures the number of new highs made on an exchange divided by the number of new highs plus new lows. This number is then recorded on a ten day moving average. The ten day moving average is plotted on a grid from 0% to 100%. We look at the Percent of Stocks Above their 10 Week Moving Average and the NYSE High-Low Index in conjunction with one another. Buy signals are given when the index goes below 30% and reverses up, as well as when a column of Xs exceeds a previous column of Xs. Sell signals are given when the index goes above 70% and then reverses down under 70%, as well as when a column of Os exceeds a previous column of Os. Moves below the 10% level are considered extremely washed out.

Horizontal Price Objective

When a notable base has formed on a chart, we typically calculate the price objective using a horizontal count. The Horizontal Price Objective is determined by measuring the size of the base that the stock (or other investment vehicle) has created and broken out from – basically, by measuring the width of this base. The base of the formation must be unbroken. In other words, you must be able to count horizontally across the columns filled with X's and O's without any spaces in between. You find the widest part of the base that is unbroken to count. There are no minimum columns required but you will see many charts where a large area of accumulation was created and then the chart broke out. It is these types of charts where a horizontal count is most effective. For an upside bullish target using a horizontal count, once a buy signal is given, count across the base the commodity has built. Multiply the number of columns across the formation by 3, and then multiply that product by the value per box. Add this number to the bottom, or lowest point of the base formation. This is your horizontal price target. For calculating the bearish horizontal count, you want to see a sell signal and then instead of multiplying the number of columns in the base by 3, you multiply by 2. Then after multiplying that product by the box size, the end result is subtracted from the highest point on the base formation.

Matrix

A service provided from Dorsey, Wright & Associates that allows the user to see and create his or her own relative strength comparisons amongst a universe of different investment vehicles. For instance, a portfolio of 50 stocks can be compared to one another with the stock having the most relative strength buy signals against others in the assigned group receives the highest ranking.

Momentum

At Dorsey, Wright & Associates, we use measures of momentum and overbought/oversold readings to aid in our interpretation of a stock. The measures are computed by our database, and can be accessed by clients. We have three different momentum calculations: daily, weekly, and monthly momentum. Daily momentum is a very short-term trading tool. Following weekly momentum is very helpful when timing trades as well, but it gives a slightly longer horizon. It is an intermediate tool as changes to positive or negative weekly momentum last seven weeks on average. The monthly momentum is used more to highlight or signify a longer-term turnaround.

Using weekly momentum as an example, the calculation is basically a one week moving average compared to a five week moving average. The moving average is also exponentially weighted and smoothed. When the one-week moving average crosses above the five-week, we say the weekly momentum has turned positive. This would suggest higher prices for the stock. When the one-week moving average crosses below the five-week, we say the weekly momentum has turned negative. This would suggest a pullback in the stock, or a sideways consolidation is due. Momentum calculations are used as a supplement, not a substitution for, the Point & Figure chart.

Mutual Fund Box Sizes

Because mutual funds are generally less volatile than an individual issue we have to "speed up" the chart. Instead of using a scale of ½ point per box (for a typical mutual fund, trading between $5 and $15), we instead use a default scale, also called the Intermediate scale, of 20 cents per box. The short-term chart is half that size at 10 cents a box. The long-term chart follows the stock scale and is at 50 cents a box for this price range. The boxes sizes differ to produce a sensitivity range that helps you in evaluating that mutual fund. Smaller box sizes make the chart more sensitive also increasing signal noise. Bigger box sizes reduce sensitivity and reduce noise. As with stock charts, mutual fund box sizes can be customized on DWA’s Global Technical Research Platform.

NYSE Bullish Percent

This is a major market indicator which tells us whether to be on the offense or defense. It is calculated by dividing the number of NYSE stocks trading on point and figure buy signals by the total listed on the Exchange. The percent of stocks on buy signals in is then plotted on a grid from 0% to 100%, where each box equals 2%. Levels above 70% are generally considered overbought, and below 30% are considered oversold. The best buy signals come when the NYSE Bullish Percent goes below 30% and then reverses up (must reverse 6%). The best sell signals come when the indicator moves above 70% and then reverses below 70%. The most important concept to keep in mind is field position and what team is on the field. When the NYSE Bullish Percent is in X's, the offensive team is on the field and wealth accumulation strategies are the focus. Conversely, when the NYSE Bullish Percent is in O's, the defensive team is on the field and wealth preservation strategies are the focus.

Peer Relative Strength

Just as the name implies, peer relative strength is a measure of how one security is doing compared to an index of its peers or stocks from the same sector. The daily calculation of peer relative strength is to divide the price of the stock by the corresponding DWA Sector Index. The resulting figure is then plotted on a relative strength chart. A double top buy signal suggests the stock will outperform the peer group longer-term and a double bottom sell signal suggests the stock is under perform the peer group longer-term. For shorter term guidance we look at the column of the Peer Relative Strength Chart. A column of X’s would denote positive near term relative strength while a column of O’s would denote negative near term relative strength.

Percent of Stocks Above Their 10 Week Moving Average

A measure of the percent of stocks within a universe that are above their 10 week or 50 day moving average. Charted on the same type of grid as the bullish percents. Buy signals are given when the index goes below 30% and reverses up, as well as when a column of Xs exceeds a previous column of Xs. Sell signals are given when the index goes above 70% and reverses down, as well as when a column of Os exceeds a previous column of Os. This is considered a short term indicator and works best when the signal is moving in concert with the signal of the High-Low Index.

Percent of Stocks Above Their 30 Week Moving Average

The number of stocks above their 30 week moving average divided by the total number of stocks on the index. This percentage is then plotted on a grid that goes from 100% to 0%. The 30% level and below is the "Green zone" or oversold territory while the 70% level and above is the "Red zone" or overbought territory. We look at both the column and the signal on this chart. Dan Sullivan of the Chartist found that when the Percent of 30 goes above 80% and then falls below 60% it will see 40% before it sees 80% again, and has worked virtually each time it has happened.

Price Objective

Price objectives are a key component in determining the risk-reward ratio of a trade. There are two types of price objectives, the horizontal price objective and the vertical price objective. The concept behind calculating price objectives is akin to the science of ballistics – how far a bullet will travel after its initial impulse, based on the size of its powder keg, the size and attitude of its barrel, air temperature, and other factors. Both bullish and bearish price objectives can be calculated for a stock depending on its last signal. The vertical price objective is the most often used but the horizontal can be very useful when the chart allows for this type of count. Just because a security has reached its price objective doesn’t mean it can’t continue further. The overall trend is our main guiding factor but the price objective is very useful for initially determining a risk-reward ratio.

Relative Strength

Relative strength measures the performance of one security in comparison to another. For example, how Microsoft is performing compared to the S&P 500, or how the U.S. Dollar is doing relative to the Euro. To calculate relative strength, take the price of one security and divide it by the other (the security you want to compare), then plot the daily values on a Point & Figure chart. A relative strength chart is considered to be on a buy signal if the chart is on a double top. A relative strength chart is considered to be on a sell signal if the chart is on a double bottom. Because relative strength signals last on average about two years, we also will look at the column of the relative strength chart for near term guidance. When looking at an index to index relative strength chart and ETF relative strength charts, we do look to the column of the chart for guidance rather than the signal because these baskets of stocks tend to move slower than individual names.

Risk-Reward

The process of evaluating how much risk you will take on compared to how much reward you can expect to gain on any given trade. Typically when evaluating Risk-Reward, we like to see a two to one ratio, at a minimum. In other words, for every point at risk, we want to have two points potential reward. To determine the "reward" portion of the calculation we look to significant resistance areas on the chart, the top of the trading band, or price objectives. For the "risk" portion of the calculation, determine your stop loss point by either a sell signal or a violation of a major support area like a bullish support line.

Sector Bell Curve

A composite picture of where each sector is on its bullish percent chart. To get this composite picture, the vertical axis of 0% to 100% on the bullish percent chart is flipped to the horizontal axis and then the first four letters of each sector are plotted to get an overall feel for where most sectors are on their bullish percent charts. A bell curve that is skewed to the right hand side suggests higher risk while a bell curve that is skewed to the left hand side suggests lower risk in the market.

Selling Climax

The selling climax can signal that a stock has made an intermediate-term bottom. The selling climax occurs when a stock makes a new yearly low (52 week) during the week, then closes up for the week. Such action in a stock suggests that the selling pressure has reached a climactic level. When such a selling climax occurs, it can signal that a bottom has been made in the stock. For aggressive investors, this climax can provide a buying opportunity.

Shakeout

A stock forms two tops at a level but does not actually give a double top. This is followed by a double bottom to "shakeout" the weak holders of the stock. The action point to buy on the shakeout pattern is the first three box reversal up after the sell signal. The shakeout pattern is considered complete when the triple top is broken. This pattern must occur above the bullish support line to qualify. Overall a bullish pattern.

SmartChart

An exclusive DWA service allowing the user to customize the box size of their Point & Figure chart as well as create unique relative strength charts of stock vs. stock, stock vs. fund, stock vs. ETF, etc.

Supply and Demand

Supply and demand are the economic forces that determine prices, and price movements, in the markets. Supply is represented by holders of a security, who will demand a certain price in order to sell. Demand is represented by buyers, who determine the price at which they are willing to buy. Price movements are determined by the balance of these two forces - oversupply will drive prices down, and higher demand will drive prices up. The Point & Figure chart is a highly effective way to display price movements driven by supply and demand, and enable an analyst to recognize meaningful patterns in those movements.

Technical Attribute

A ranking system that is applied to all stocks using both trend and relative strength analysis. There are five criteria measured; relative strength signal versus the market, relative strength chart column versus the market, relative strength signal versus the peer group, relative strength chart column versus the peer group, and trend. Stocks with at least 3 out of 5 technical attributes positive are considered to be "solid citizens", and are desirable to buy or hold. Stocks with 2 or fewer technical attributes are most vulnerable to declines.

Trading Band

A trading band is a moving average "envelope" around the price of a security. For every stock, index, ETF, commodity and mutual fund, we take ten weeks of data and put that information, along with a volatility calculation, into a statistical bell curve formal. This gives us an intermediate term "trading band" for the stock. When a stock gets near the top of that ten week trading band or near the 100% overbought level, it tells us to expect a pullback to at least normal. When a stock gets near the bottom of the ten week trading band or near the 100% oversold level, it tells us to expect a rally to at least normal. The stock in question can move the position on the trading band in one of three ways. The stock's price can change, the curve can shift as weeks are deleted and added to the calculation, or a combination of the two. This is a shorter term, secondary indicator that is used to help better time a purchase or sale after trend and relative strength analysis has been performed.

Trend Line

One of the main premises of technical analysis is that prices tend to trend. Therefore, one of the main purposes of a chart is to help in the identification of the overall trend of a given stock, index, mutual fund, ETF or commodity – and to then play the direction of that trend for as long as it stays in force. In the Point & Figure methodology, there are two main trend lines that are used: the Bullish Support Line and the Bearish Resistance Line. It is these trend lines that allow us to easily identify whether the vehicle is in an overall "uptrend", or whether its main trend is negative, and in a "downtrend". Trend lines are very easily drawn using the P&F method, whereas bar charts and other methods can be very subjective in nature. Trends (upward or downward) can stay in force for months or years at a time.

Triple Bottom

A column of O's exceeds two previous columns of O's or levels of resistance. There can be quadruple bottoms, quintuple bottoms, etc. A bearish pattern.

Triple Top

A column of X's exceeds two previous columns of X's or levels of resistance. There can be quadruple tops, quintuple tops, etc. A bullish pattern.

Triple Witching

Triple Witching occurs when stock options, futures and futures options all expire on the same day. It is actually now Quadruple Witching as stock futures also expire on the same day. This phenomenon occurs four times a year; the third Friday in March, June, September and December. These weeks can often bring with it a lot of volatility.

Vertical Price Objective

The most common price objective used, the Vertical Price Objective is the default price objective used at the top of charts on the DWA website. To calculate the vertical price objective, look to the column that has the first buy signal off the bottom (following the last sell signal) and count the number of X's in it. You wait for the reversal down into a column of O's before counting the number of X's to ensure there will be no more X's added to the column (otherwise the count is considered to be "incomplete"). Once you have counted the X's, multiply by 3 (for the P&F three-box reversal method) and then multiply that product by the value per box. Add this result to the bottom X, and that is your count or price target. To calculate the downside, bearish target using a vertical price objective, the process is essentially the same, just in reverse with one minor difference. Count the number of O’s in the column after the first sell signal off the top, then multiplying that by 2 (instead of 3), and then multiplying by the value of each box. Then subtract that number from the top O’s price, and that is your bearish price objective.

Volume

Volume is the number of shares of a given security being traded in a day. Point & Figure charts do not directly take volume into consideration. The volume of shares being traded may offer an indication of market interest in a stock, but does not directly influence the price. It is the balance of supply and demand that determines price movements.