Footsie's downside risk

By David Linton 28/08/2007 00:00
Many people struggle with point and figure charts, which as a great shame because they are invaluable when it comes to assessing objective trends and price targets.

For a true understanding refer to Jeremy du Plessis’ book, The Definitive Guide to Point and Figure, but here we take a look at what the point and figure chart tells us about Footsie right now.



Firstly, point and figure charts are constructed with Xs on rising prices and Os on falls. This is a 50x3 chart which means that every rise through 50 points paints another cross and every fall through 50 a nought. But, you need a reversal of 3 boxes (150 points) to change columns. This unique asynchronous filter means you need one step with the trend, three steps against. Long columns of Xs therefore indicate uninterrupted buying, while long columns of noughts mean selling thrust.

Objective Trends
These charts use 45 degree trends off the extreme points. This gives you the immediate advantage over trend lines on line charts in that they are not retrospective. Once you can clearly see a trend line on a line chart there is an increasing risk the trend is now mature and will soon be broken. P&F trends are also completely objective, whereas normal trend lines do give you a bit of scope for artistic licence. For instance, we are still in an uptrend (bull market) on Footsie, but if the support trend does get breached the new downtrend (dotted) will kick in. This gives us the edge in having this trend now to keep an eye on.

Price Targets
Perhaps the biggest advantage of point and figure charts is the ability to project price targets based on the extent of the initial buying and selling thrusts. Notice how the upside targets previously given were all met. Now we have a new downside target of 5,200 points based on this summer’s selling thrust. This maybe an overly pessimistic target for the market and the bull trend would still be intact. Either way this downside risk hangs over us until the market makes new highs at which point the downside target will be negated.

David Linton CFTe, MSTA

David is Chief Executive of Updata plc (www.updata.co.uk) and editor of Tipstracker.com

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