| Welcome: |
|
| Lesson 2: |
Part 1 continued... Chart Patterns |
Bearish Catapult
This can be interpreted exactly opposite the Bullish Catapult
formation and is particularly useful in timing short sales as it clearly shows supply in control. Watch carefully for this pattern because it suggests lower prices from the underlying stock. Below is an example of how it is formed.
Let's break this down some more.
 Interpreting what this formation is telling
us we first see the Triple Bottom break, which you have already
learned is very negative for the stock. |
I n the same respects of a Bullish Catapult
being a confidence builder the Bearish Catapult is a confirmation
of a stock breaking down. The Triple Bottom sell signal is then
followed by a lower top and a Double Bottom sell signal, two
sell signals in a row along with a lower top. |
These two signals together
clearly show supply coming into control of the stock and demand drying up.
| Looking at the two stocks to the right.
If they are both recommended on a fundamental basis, in the same
sector and at the same price, which one would you buy? Clearly, you would
pick the one on the left. The beauty of Point and Figure is that it is very
visual, very easy to see which stocks are rising and which are breaking
down. |
Bullish Catapult
|
Bearish Catapult
 |
The
Triangle Formation
| The Triangle formation is easily identified by the higher bottoms and lower tops. This sounds a little backwards but what is happening is that the chart is a bit confused. There is no clear winner in the battle between Supply and Demand. As the lower tops and higher bottoms develop the chart comes to a point creating the triangle look of the pattern. When the chart comes to a point either supply or demand will have to gain control and either a double top break or a double bottom break will be given. A break to the upside designates a Bullish Triangle and a break to the downside designates a Bearish Triangle. To qualify as a Triangle, the pattern must have at least five vertical columns. Examples of the Bullish and Bearish Triangle are below. |
5 columns needed to complete a triangle. |
Bullish Triangle
If the pattern resolves itself upward, it will give a double top
buy signal. The Double Top buy signal simply suggests that demand
has won the match and the probability is higher prices in the
stock. |
 |
Bearish Triangle
If the pattern breaks down the match is won by supply. The Double
Bottom sell signal suggests that the probability is lower prices
in the stock. |
 |
Spread Triple Top Pattern and Spread Triple Bottom Pattern.
This pattern is basically the same as the triple top and triple bottom with one exception. The testing of the support or resistance level is not completed in three consecutive columns. For example, a stock may rally and test 55 twice, then on the third trip back up it only reaches 53 before it pulls back again. Then on the fourth attempt it is able to break the 55 level. The stock still exceeds the 55 level it tested three times but there was a "spread" between the second and third attempt. This is one that is best understood by looking at an example.
|
Spread
Triple Top
A gap in between three columns of X's at the same level.
|
Spread Triple Top break.
A column of X's exceeds the spread triple top.
|
Spread Triple Bottom.
A gap in between three column of O's at the same level.
|
Spread Triple Bottom break
A column of O's exceeds the spread triple bottom.
|
The same philosophy applies with these patterns as the Triple Top and Bottom. We will take a look from the Triple Top perspective. In each case, the stock rises to a certain price level and is repelled two times. The third attempt at that price is successful
by the stock moving through the level shown by a column of X's
exceeding the point of resistance. Since the stock was repelled
twice at that same level, there are apparently sell orders there.
The reason is not important. What is important is that you know
there are sellers at that particular level. The only way to
know if demand can overtake the selling pressure is to see how
the stock negotiates the level again. Simply stated, if the stock
is repelled again at this level of resistance, the sellers are
still there. You need not know any more. If the stock exceeds
that level, then demand has overcome the supply that previously
caused it to reverse.
Notice that in the following
two patterns, the stocks are trading at the same price. Consider
that both stocks are fundamentally sound and each is being recommended
by a major firm on Wall Street. Both stocks are in the same industry
group and pay about the same dividend. You have studied the fundamentals
of the two stocks and are now trying to determine which stock
to buy. It's the moment of truth. Which stock do you select?
| Stock A: Spread Triple Top |
Stock B: Spread Triple Bottom |
|
|
Without the chart patterns
shown here, you would be in a quandary. Looking at the fundamental
data alone, both stocks are equal, therefore both stocks should
do about as well in the future. Not so. If you had the benefit
of evaluating the Point and Figure charts the selection process
would become much easier. With the information and charts above
which stock do you select? It doesn't take an in-depth understanding
of this method to determine Stock A is on a buy signal with the
probability of higher prices and Stock B is on a sell signal
with lower prices likely.
This simple exercise shows why
charts are so important and why you can achieve the best results
in the market when you use both fundamental and technical analysis.
|
