Technical Analysis

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.

During a previous video, Tim explained that on point and figure relative strength charts, we care less about patterns and more about column and signal. I recently took some time to describe what the column of a point and figure relative strength chart tells us.

It’s easy to identify what column a point and figure relative strength chart is in. There are only two options: it’s either in a column of X’s or O’s. As simple as this seems, it’s one of the most important attributes we look for on any relative strength chart.

What’s the Significance of a Relative Strength Chart’s Current Column?

A relative strength chart’s current column tells us about the security’s short term performance.

– If it is in a column of X’s, it’s been experiencing near term outperformance
– If it is in a column of O’s, it’s been experiencing near term underperformance

On a similar note, fresh X’s or O’s being added to the same column of a point and figure relative strength chart signifies a continuation of its trend. So additional X’s represent continued outperformance and additional O’s represent continued underperformance.

Just remember that when it comes to the column of a point and figure relative strength chart, we’re learning about its short term performance.