Point & Figure charting dates back to the inception of modern market analysis. It is a unique form of charting in that it is only concerned with price movement, ignoring time constraints. Typically, Point & Figure charts are constructed using a box size that equals one point and requires a 3 box movement for a column reversal. A stock that closes over 100 would require a 3-point move to earn either an X or an O designation. Stocks that close at 20 or below need only a 1/2 point move on a daily basis to generate either an X or O entry.
Assume that a stock has declined from 40 to 20 over a ten-day period. The chart would reflect a string of twenty O's depicting the decline. Then the stock rallies over three days back to 24. This would result in the creation of a new column called a reversal column, which consists of four X's. For a reversal column to be added to the chart there must be a minimum of three boxes. As the stock continues to climb, additional X's would be added to the column until such time that a new reversal column, consisting of three or more O's, is produced
Since there is no time reference on the chart, X's and O's are replaced by numbers and letters that represent the months of the year. Number 1-9 indicates January (1) through September (9). The letters A, B & C are inserted for October, November and December.
The most common Point & Figure chart formations are the Double Top/Double Bottom and the Triple Top/Triple Bottom formations. When these formations are formed and then price exceeds either the previous high or low, a breakout occurs. The significance of the breakout is that price has penetrated either a prior support or resistance area setting the stage for a continuation of the move. The following are examples of a Double Top breakout (CHIR - Bullish) and a Double Bottom breakout (MRCY - Bearish).
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