Point & Figure Trendlines
P&F trendlines are integral to successful Point & Figure investing. Trendlines provide an instant summary of stock or index direction. In turn, bull and bear markets are readily identified with a mere glimpse of the chart.
Trendlines were traditionally drawn on paper P&F charts via hand, with a pencil and ruler. These days Point & Figure trendlines may be automatically plotted online.
Below is a screenshot of our pure P&F charting tool. The trendlines option to the right is selected. To plot your own Point & Figure charts online take advantage of our free trial.
Benefits of P&F Trendlines
Point and Figure trendlines have a huge benefit over lines on a conventional chart. To be drawn, the P&F trendline only needs one point of contact! The Point and Figure trendline is drawn as soon as a new uptrend begins. Trendlines drawn on bar or candle charts may have to wait weeks before the mandatory two clear points appear. Furthermore, trendlines on bar and candle charts are highly arbitrary, their position depends on the users skill, and emotion. However, the rules of P&F eliminate human subjectivity. On a Point and Figure chart there is only one position to draw trendlines from.
Bullish Trendlines and Bearish Trendlines Explained
Stocks trading above a Bullish trendline are considered good. Stocks trading beneath a Bearish trendline are bad. It really is that simple. Therefore, Point & Figure trendlines are classified in two ways.
- Bullish trendlines are rising and provide support to a bull trend.
- Bearish trendlines are falling and serve resistance to a bear trend.
Trendlines ensure investors remain with the trend. As a result, the old Wall Street adage of the Trend is your Friend is fulfilled.
Identifying Trendlines and Drawing Trendlines
Theory of Drawing a Bullish Trendline
- First, observe a significant low on the chart. A low could include a bear market low or correction low.
- In the box directly beneath the column of Os for the low, draw a line, at a 45 degree angle. Extend trendline support to the right, up across the chart.
- The bullish trendline will remain on the chart, and may be extended, until such a time as it is broken.
- When the bullish trendline is penetrated, trendline support is no more. Therefore, the line terminates.
- Above steps are repeated when the next notable low point appears on the chart. Consequently, new trendline support emerges.
Theory of Drawing a Bearish Trendline
- Start by seeking out a significant high on the chart. An important high such as a bull market peak or rally end point.
- In the box directly above the column of Xs for the peak, draw a line, at a 135 degree angle. Extend the line to the right, down across the chart.
- The falling bearish trendline remains on the chart, and may be extended, until such a time as a column of Xs rises through it.
- Once the bearish trendline is penetrated, the line terminates.
- When a subsequent peak appears, a fresh bearish trendline is drawn. Thereby, providing new trendline resistance.
Investing with Point & Figure Trendline Support
P&F O column moves, down to rising trendline support, are often buying opportunities. A 3 box reversal across the trendline is needed to confirm support has been found. Entry is then sought on a bullish breakout signal. Typically the initial signal is a Double Top. Additionally, look for buy confirmation from the relative ratio, that too must demonstrate bullish activity.
The strongest recoveries from Point & Figure trendline support incorporate a bear trap across the identified level. Furthermore, a confluence of support will strengthen the signal. Therefore, simultaneous tests of horizontal support and perhaps a key moving average, along with the trendline, creates a trifecta of support.
Should a long position be entered following a successful reversal signature across trendline support, a stop is essential. The stop-loss may be placed just beneath the low of the reversal; the box beneath the column of Os.
Investing Tip - When a stock trades above P&F trendline support, buy signals are given more value than sell signals. The latter are more prone to failure given the prevailing trend.
Trading P&F Trendline Resistance
During a bear market, a rising column of Xs into trendline resistance often presents a shorting opportunity. Sell confirmation begins with a 3 box reversal from around the bearish trendline. Next, a breakdown signal is needed, and that is the green-light to go short. That initial signal is usually a Double Bottom. Additionally, look for a weak relative ratio chart.
A stop is necessary should a short position be entered. The stop-loss may be placed one box above the column of Xs.
Trading Tip - When a stock trades beneath trendline resistance, sell signals are given more precedence than buy signals. The latter are more likely to fail given the prevailing trend.
Trendlines through Scale Changes
When P&F trendlines pass through scale changes, as they invariably do when using the semi-log Chartcraft scaling method, special attention is called for.
We shall explain the issue through example, via the price charts for Scotts Miracle-Gro (SMG) as of November 2018.
The SMG chart below is semi-log, with just one scale change in this price range, across $100. On the chart, boxes beneath $100 are $1 per box, above $100 they are $2 per box. The trendline off the peak in January 2018 started from a level of $2 per box and fell to $1 per box. The trendline was visited in November 2018, with the price then rolling back to the downside.
Chartcraft Semi-Log Scale
The second SMG chart, below, uses a linear scale, a 1% box size, derived from its current trading level. On this setting, the trendline drawn down from the January peak was breached in early October. A second bearish trendline was then drawn and that was breached in early November.
1% Box Size Scale
Both charts relay the same message, albeit with slight variation. They show counter-trend rallies that encounter P&F trendline resistance, followed by downside reassertions.
Therefore, when Point & Figure trendlines dissect scale changes, extra examination is necessary. The more scale shifts they have cut through, the less reliable a trendline becomes. Nonetheless, they will always serve as a rough guide to overall trend direction, regardless of whether they are log scale or not.