Point & Figure High Pole Reversal Explained
The P&F High Pole is a market sell signal. The reversal pattern begins with a simple breakout above the prior column of Xs. The column of rising Xs must exceed the prior column of Xs by 3 or more boxes. A 3 box reversal down follows, resulting in a down column of Os, downward price direction. When the falling column of Os retraces 50%, at least, of the preceding X column, the High Pole Point & Figure sell signal is activated.
A trader pursuing the pattern, should ideally seek secondary confirmation via a follow-up P&F bearish signal. Additional downside confirmation is most often provided by a Double Bottom.
Psychology of a High Pole pattern
The High Pole reversal is a taller variant of the Bull Trap. The sharpness of the upside breakout gives the impression a new up leg is underway. Sensing a rally, shorts panic cover and simultaneously relaxed buyers are suckered in. The initial upside extension is very often good news-driven, perhaps an earnings beat in the case of a stock. However, with the rapid rise, the news catalyst is instantly absorbed by the market, demand dissipates. Supply swamps demand, causing the price to reverse and collapse lower at breakneck speed. Recently entered long positions are trapped on the wrong side of the market, in losing positions. Selling pressure intensifies as a domino effect takes hold. The market drops.
How to Trade?
High Poles in a Bull Market
In a bull market the High Pole is a signal to take profit on, rather than a signal to enter shorts on. The late Mike Burke, of Chartcraft, observed that prior to the 1987 crash many stocks were printing High Poles. He was able to exit the market, pocketing stock profits ahead of the crash. A large cash pile was available for bargain hunting following the crash, seeking out signals such as the bullish Low Pole.
High Poles in a Bear Market
The High Pole Point & Figure sell signal truly comes into its element during a bear market. The signal is a great tool for identifying completed dead-cat bounces, with a view to enter short positions.
Earl Blumenthal, a member of the Chartcraft team in the 1970s, used the High Pole to enter short positions when the pattern straddled falling trendline resistance. Rising and then reversing across a down trendline is a strong indication that a bear market is ready to resume. Resistance line tests often see greater trading volume, more intense market activity, a trait of the High Pole Point & Figure pattern.
Further Technical Analysis
To boost downside conviction, prior to trading a High Pole sell signal in a bear market, additional research is essential.
- Ensure the primary price trend for a stock, or index, is down. Point & Figure bearish trendlines are the tool to use. Look for P&F High Pole pattern development at, or beneath, a medium-term falling trendline. Trading beneath the falling 30-week moving average is also effective for bear market assurance.
- Identify other P&F sell signal types preceding the High Pole over the prior months. They will add confidence in the downtrend resumption.
- When considering a short position, take a look at the Point & Figure relative ratio. The ratio chart needs to be in a bear market of its own, falling on a medium to long-term basis. An underperforming stock is sick. Consequently, more vulnerable to successful bearish patterns such as the High Pole Point & Figure reversal.
- Finally and most importantly, consult the sentiment condition of the stock or index in question. Briefly look over recent headlines specific to the chart that has built the High Pole. Good news on the upside pop, perhaps a surprise earnings beat, followed by a near immediate 3 box reversal down would reveal the seemingly bullish event is already fully priced in.
Failure Potential of the Pattern?
During a stubborn bear market the High Pole Point & Figure pattern has impressive reliability. Presence of the pattern indicates completion of a dead-cat bounce, a secondary counter-trend move.
On the other hand, High Poles during a bull market are short-lived affairs. Typically, they fail to follow-through to the downside. Shorting a High Pole pattern during a bull market is highly speculative and best avoided all together. However, should High Poles appear abundantly across the whole stock market, coupled to bullish market sentiment, then a market top could be in the making.
Where to position a stop-loss?
Once a High Pole is confirmed and additional research is agreeable, such as sentiment, a stop-loss strategy is a must for short positions. The initial stop should be placed one box above the prior column of Xs. As the downtrend gathers steam, the stop could be trailed lower. Wait for a subsequent counter-trend move to fail, then tighten the stop down to one box above that more recent column of Xs.
How to determine a price target?
The High Pole pattern has attractive height and that can be used in a downside objective calculation. Therefore, the vertical count is the tool to use. Additionally, circle obvious downside levels of support on the chart, as they invariably have a degree of magnetism.
High Pole Reversal Explained by Example
High Pole into Moving Average and Trendline resistance
September 2019, ConocoPhillips produced a compelling High Pole Point and Figure pattern. The formation straddled both the 30-week moving average and a Bearish Trendline. That double resistance failure, in the midst of a yearlong downtrend, provided a fresh window to establish shorts.
The P&F relative ratio chart for COP is also shown to highlight a High Pole of its own. At the end of 2018, the pattern occurred into a Bearish Trendline, dating back to 2014. An accurate warning sign of the underperformance to come!
Significance of Bearish Trendlines
The PHLX Oil Service Index confirmed a High Pole, into a Bearish Trendline, during September 2019. Although the trendline is not totally perfect, since it passed through a change in scale at 100, it still provides of region of falling resistance. The High Pole here indicates a reassertion of the long-term downtrend, an opportunity to re-establish short positions or reduce long exposure.
Multiple High Poles are a red flag
The Energy ETF chart generated a series of reliable High Pole sell signals between 2017 and 2019. In each case the fund rallied on false hope only to roll back to the downside. October 2018 saw a classic dead-cat bounce, illustrated by the High Pole Point & Figure reversal. May 2019 saw a further rally failure in the midst of a downtrend, occurring just beneath a Bearish Trendline, a perfect selling opportunity.
High Pole ahead of downtrend resumption
Preformed Line Products (small cap telecom services firm) generated a High Pole in January 2019. During that period the general market was bottoming, following the correction over the final quarter of 2018. However, this stock remained an underperformer, contained in a strong downtrend. The price hit a low of $45.12 in June 2019, a 20% loss six months on from the chart below.
Additional sell signal evidence
Oshkosh Truck confirmed a High Pole P&F pattern in late September 2018. The pattern occurred across a Bearish Trendline, adding confidence in the sell signal. The price made of low of $51.42, two weeks after the chart illustrated below. At the end of 2018, the market bottomed, the Oshkosh price recovered. As of September 2019, the price is struggling at resistance from the apex of the High Pole, across $77.