Chart School

We’ve previously discussed the following configurations for point and figure relative strength charts:

Buy Signal in X’s
Buy Signal in O’s
Sell Signal in X’s

Today we conclude our discussion on the four types of point and figure relative strength chart configurations by discussing what it means when we see a chart on a sell signal and in a column of O’s.

To put it plainly, this security is likely to be a laggard. When a relative strength chart is on a sell signal that identifies its longer term underperformance versus the specified benchmark. Near term underperformance is characterized by the chart being in a column of O’s.

Longer term underperformance, without any signs of near term improvement, makes this the weakest point and figure relative strength chart configuration. This is one to be avoided if your investment strategy focuses on high relative strength securities.

Source:

http://dorseywrightmm.com/sites/default/files/White%20Paper%20-%20PnF%20RS%20Signals.pdf

There’s a big difference between a point and figure relative strength chart on a buy signal and one on a sell signal. According to a recent white paper written by John Lewis, CMT of Dorsey Wright Money Management:

“Stocks on relative strength sell signals underperformed the market by a wide margin. Whether they were in a column of X’s or O’s, they performed worse with more volatility than either of the two benchmarks.”

Being on a relative strength sell signal is a big deal. It indicates long term underperformance by the security. Being in a column of X’s shows that the security has been outperforming its benchmark in the near term. However, until that security has reversed its point and figure relative strength chart to a buy signal, the long term trend is still one of underperformance.

Source:

http://dorseywrightmm.com/sites/default/files/White%20Paper%20-%20PnF%20RS%20Signals.pdf

http://systematicrelativestrength.com/2014/09/02/point-figure-rs-signal-implementation/

As we discussed on a previous video, the optimal configuration for point and figure relative strength charts is to be on a buy signal and in a column of X’s. In this video, Casey continues the discussion on point and figure relative strength chart configurations.

What does it mean when a relative strength chart is on a buy signal and in a column of O’s?

When a point and figure relative strength chart is on a buy signal, it indicates outperformance over the longer term. When a point and figure relative strength chart is in a column of O’s, it indicates underperformance in the more recent past. So while the longer term performance trend may still be intact, the tides could be changing.

We believe it’s very important to stay abreast of column changes on relative strength charts. The shorter term often spills over into the longer term. Column changes are what lead to signal changes.

As Tim shared on a previous video, point and figure relative strength charts can be configured in one of four ways. One of these configurations involves being on a buy signal and in a column of X’s.

What Does This Point and Figure Relative Strength Configuration Tell Us?

When a point and figure relative strength chart is in a column of X’s, it signifies near term outperformance versus its benchmark. When a point and figure relative strength chart is in on a buy signal, it indicates longer term outperformance versus its benchmark.

When a point and figure relative strength chart is on a buy signal and in a column of X’s, it is performing better than its benchmark on both a near term and longer term basis. This is the optimal relative strength chart configuration to seek for potential investments.

To quote a whitepaper on this subject written by our friends at Dorsey Wright Money Management:

“No matter how you look at the data, over long periods of time the stocks on point and figure relative strength buy signals and in a column of X’s are really where you need to focus.”

Source:

http://dorseywrightmm.com/sites/default/files/White%20Paper%20-%20PnF%20RS%20Signals.pdf

Compared to point and figure trend charts, point and figure relative strength charts are much more straightforward. Rather than identifying patterns, like the bearish signal reversal or bullish triangle, we are simply looking for two things: the chart’s current column and signal.

A point and figure relative strength chart can be on a buy signal or a sell signal, and it can be in a column of X’s or O’s. We’ve previously discussed that a relative strength chart’s current column tells us about its shorter term performance, while its current signal tells us about its longer term performance.

The four configurations that a point and figure relative strength chart can have are:

– Being on a buy signal and in X’s
– Being on a buy signal and in O’s
– Being on a sell signal and in X’s
– Being on a sell signal and in O’s

These chart configurations can tell us a lot about a security’s relative strength. We will be discussing each relative strength chart configuration in more depth during upcoming videos.