What is a Point & Figure Low Pole Reversal?
The Low Pole reversal is a bullish Point & Figure trading pattern. The pattern begins with a breakdown beneath the prior column of Os. The falling column of Os must exceed the prior column of Os by 3 boxes or more. Next step, a 3 box reversal back to the upside. A Low Pole P&F pattern activates when the rising column of Xs retraces the prior column of Os by 50%.
Investors should ideally wait for secondary confirmation via a subsequent bullish signal, typically a Double Top breakout.
Psychology of a Low Pole pattern
The P&F Low Pole reversal is an extended Bear Trap, a deep shakeout. Longs are scared out of the market by the ferocity of the breakdown. At the same time, hopeful shorts are suckered in. Very often bad news is the catalyst for the price collapse. However, the negative event is rapidly priced into the market, traders intending to sell have already done so. Demand exceeds supply. Price direction reverses and a short-squeeze commences, often the precursor to the strongest market rallies.
How to Trade?
Low Poles in a Bull Market
The Low Pole P&F pattern has a great track record for catching pull-back terminations during an established bull market. Furthermore, when the signal appears enmasse, across the charts of index constituents, a market correction itself is likely complete.
Low Poles in a Bear Market
To time the covering of short trading positions, the late Mike Burke of Chartcraft would use the Low Pole reversal. However, the pattern should not be used to bottom fish during a bear market with regards long-term investment longs. The pattern stands a good chance of forecasting a dead-cat bounce and little else. Such pops are short-lived and best avoided.
Further Technical Analysis
Once a Low Pole reversal prints, additional investigation should be undertaken, to gauge the pattern's potential.
- The medium to long-term price trend on the chart needs to be up. Essentially, the stock, or index, must clearly be contained in a bull market. Supporting evidence includes trading above a multi-month bullish trendline. Basically, the trend on the chart should be from the lower left hand corner, to the upper right hand corner, simple but essential.
- Attractive, a Low Pole pattern finding support across a rising 30-week moving average. Strengthening the buy signal, a brief break of the average, a technical shake-out.
- In a bear market environment, the Low Pole buy signal is weak and prone to failure. Best avoided.
- Consultation of the relative ratio P&F chart is necessary, more so when the stock is to be held for a prolonged length of time. The relative chart must be trending up on a medium to long-term basis. Outperformance is reflected by a rising relative ratio. More reliable Low Poles are produced by an outperforming stock.
- Caution needed when Bearish Trendlines wait above the Low Pole. They pose resistance to the pattern and ideally need to be defeated before entering a long position.
- Essential and perhaps of greatest value, the consideration of market sentiment. Review the news-flow, via news feeds, during the Low Pole's development. If news was bad on the breakdown, then the reversal suggests that event is fully priced in. A price recovery accelerates when shorts need to cover. Monster rallies often start with a good short-squeeze. The Low Pole reversal, with its "V" silhouette, is often an early indication of that activity.
Failure Potential of the Low Pole?
The Low Pole is a reliable buy signal during a bull market, providing certain technical conditions are satisfied.
However, do not trust the Low Pole P&F pattern during a bear market. In this situation, the rising column of Xs is most likely a transitory counter-trend move, a dead-cat. That said, in the final throes of a bear market, a Low Pole reversal around long-term lows could mark the bottom. Particularly if a good percentage of the market, at the stock level, are confirming Low Pole reversals. Case in point, the 2008 through 2009 equity market bottom saw hundreds!
Following long entry a stop-loss should be placed one box beneath the column of Os that caused the breakdown beneath the prior column of Os. As the recovery gains pace, the stop could be trailed higher, to just beneath the next completed column of Os that develop.
How to determine a price target?
The Low Pole P&F pattern is graced with depth. Consequently, the column depth is a useful variable for determining an upside price objective. Therefore, a vertical count is the preferred method, coupled to awareness of upside resistance levels. Major overhead ceilings will draw the price higher, particularly psychological round numbers, such as $100.
Low Pole Reversal Explained by Example
Low Pole through range floor
In early 2019, a Low Pole developed across a three year range on the U.S. Bancorp chart. A failed break of support, forming a Low Pole, boosts conviction towards a strong recovery rally. The support break sucks in shorts. Consequently, a short-squeeze ensues.
The Low Pole stop-loss
The Walt Disney chart illustrates stop-loss positioning. Once the P&F Low Pole reversal is confirmed, a stop is placed one box beneath the preceding column of Os. As the trend extends higher, watch for a pull-back. Providing no sell signal occurs on the retreat, the stop-loss can be trailed higher, to beneath the most recent column of Os.
Consecutive Low Poles
The McDonald's Point & Figure chart exhibits six Low Pole buy signal attempts over the past four years. Five of the six patterns were a success. The failed signal occurred beneath a Bearish Trendline. Consequently, should never have been followed by an investor. That failed signal, in early 2018, also demonstrated no secondary confirmation.
Low Pole into trendline support
JPMorgan exhibited two Low Pole pattern developments between January 2017 and August 2019. Both reversals were successful given the subsequent strength. The latter case provides an example of the pattern finding rising Bullish Trendline support.
QUIZ - Where would you place a stop-loss for each Low Pole? (answers are at page bottom).
Value of secondary confirmation
The NASDAQ 100 chart exhibits three Low Pole P&F pattern attempts over the course of 2017. Low Pole one and two both failed since they were merely oversold bounces during a correction. The presence of the Bearish Trendline coupled to no upside secondary confirmation, means the trader would have followed neither. However, the third Low Pole reversal was a success, propelling the index to new all-time highs!
Pattern reversal at moving average support
The Celgene chart exhibits three PnF Low Poles following its end of 2018 correction low. The third Low Pole in the series demonstrated a tidy test of the rising 30-week moving average. Moving average values are detailed in the data tables beneath each chart on our Point & Figure Charting Tool. Chart level interaction with a Low Pole buy signal add conviction to the pattern's success rate.
Low Pole preceding multiple bullish breakouts
ANSWER - JPMorgan stop-losses were initially placed at $81 and $98. The second P&F Low Pole is somewhat of a teaser since we are considering the pattern as fully confirmed following the bullish breakout (April 2019).