What generates a sell signal on a point and figure chart?
The easy answer is “the price going down!” And you would be right. But that’s kind of a “flip” response.
The number one question I get asked is “Tom, tell me WHY the stock is going down!”
That’s a tougher question to answer. Since many times, point and figure charts begin moving down (because others are selling) well before any kind of news is published. Which is why if you make investment decisions by reading the newspaper, you WILL be in the newspaper (the obituaries). We simply cannot wait for the official news, to make a decision whether to make a change in our investment.
Point and Figure charts are moved ONLY by price. When you look at a point and figure chart, all you see are columns of X’s and columns of O’s. The columns of X’s go UP, the columns of O’s go DOWN. You will never see X’s and O’s mixed in the same column. When one column of O’s goes further down than the previous column of O’s, the chart generates a sell signal.
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Now… one sell signal by itself is not the end of the world, not a reason to rush right out and tear apart your investment portfolio.
However, when a chart begins to give multiple sell signals in a short period of time, we need to pay attention. Something could be wrong.
I have a great example of these kinds of sell signals on this video. Take a look:
(once complete, jump to part II on this topic)