By David Chapman
Chart created using Omega TradeStation 2000i. Chart data supplied by Dial Data.
Point and figure charts give an interesting and different view than one normally sees with a bar chart. Point and figure charts are rarely used by technical analysts today. But point and figure charts were at one time used extensively because they were simple to maintain.
Unlike a bar chart or any other chart form the main characteristic of a point and figure chart is that it views all trading as a single continuous stream. It ignores time. The only thing that matters is price. The only thing the trader needs to determine is what box and reversal magnitude to use. The box size is the X or up price while the O is the reversal size. Putting X’s and O’s on a chart was a lot easier in the days prior to computers to allow traders to track their choice of stock, commodity or index.
The above gold chart it is using a 15x3 box/reversal size or 45 points. What that means is that unless the price decline is at least $45 one does not need to record a down move or in this case put in an O. The same occurs on the upside. Since the chart does not reflect time the above chart was actually started back in 1980 and is up to today. Thirty two years compressed into one simple chart. But it does tell a story.
Visible on the chart is the major double bottom made in 1999 and 2001 at around $255 for gold. Since then gold has made three waves up (2 waves up and 1 down) and is in the process of making a fourth wave. The first correction (wave 2) was seen with the top in March 2008. The market bottomed in October 2008. On the point and figure chart gold formed what appeared to be a flag formation. A flag formation is a corrective pattern seen in bull and bear markets. In a bull market the flag would be pointed down as it was above. The breakout point was at $950 and had minimum objectives to $1,265. There was a 3.618 Fibonacci objective that could see the market reach to about $1,925. As it turns out that was about where the market topped.
The flag formation broke to the upside in February 2009 and topped out in September 2011. Since then the formation appears to be a pennant formation again another common corrective pattern seen in bull and bear markets. As with the bull flag formation, the bull pennant formation points downward as it should.
What is needed now is a breakout to the upside. The breakout point is seen at around $1,750 and would appear to have minimum objectives up to at least $2,125. The pattern does not appear to be a topping pattern.
Point and figure charts can be quite useful to look at a stock, commodity, index etc. in a very different manner than one would view it normally. The above chart of gold suggests that 3 waves have been completed to the upside since the double bottom of 1999/2001 lows and the market is currently tracing out the 4th wave. In Elliot wave analysis a 5th wave should soon be getting underway. The 5th wave to the upside is often the longest and most spectacular one of them all. It should at least equal the first wave up which was $750. That could suggest a potential objective of $2,500 before the next major correction sets in. If the 5 waves up pattern is correct then that correction could be a significant one and correct the move up from $255.
copyright 2012 All Rights Reserved David Chapman