Knowing When to Take Action: Utilizing Point and Figure Charts

by | Oct 24, 2013 | Point and Figure

I rely on the point and figure charts and technical analysis from our friends at Dorsey Wright & Associates.  They do a great job of keeping me up to speed on what really matters, and how the sands are shifting underneath my feet, while I manage money. Knowing when to take action and how to take action is critical when it comes to investing.

Dorsey Wright cranks out a TON of information.  Therefore, it’s really important to “zoom in” on what works best for each, and focus on that.

Professional subscribers share ideas and feedback via an internal message board.  It’s interesting to see how many “followers” of point and figure continue to “spin” the information, even when the answer is very clear.  Even up at this elevation on the mountaintop, there are still folks who do not understand how this all works.  I feel bad for the clients of those advisors.  Point and figure is something that takes a long time to understand.

But once you gain a grasp of how the charts flow, it’s like taking the lampshade off the guy at the party.

A recent question was posted by an advisor at a well-known national firm.  He asked (I’m summarizing): when the long-term bullish percent charts all turn to X’s, how bullish should we be? (how bullish should we get?)

Wow.  Many readers may not even understand what this advisor just asked, so let me translate.

The bullish percent charts measure the percentage of stocks (in a particular universe) that are on buy signals.  Bullish Percent charts measure, or indicate, how many stocks are participating in the current move.  As the market tends to rally, more stocks give buy signals, pushing the percentage higher and higher.  At a certain point, nearly all (or most) stocks are on buy signals.  When that happens, this can become an indicator most stocks are already participating.  The next (eventual) move may be lower.

Bullish percent charts are a great tool to measure the level of risk in the market, and so these special charts become a good indicator for us.
But (and this is important): they are NOT a red light/green light or on/off switch.

You do not necessarily need to wait for this indicator to flip to X’s to become bullish and begin investing client assets into the market.  Indeed, in 2013 alone, we have had three trips to O’s, and yet we have sold very little this year. Knowing when to take action and when not to is very important when it comes to managing money.

What was most surprising about the question posed by this advisor is that ALL of the bullish percent indicators (with one exception, the one everyone hangs on, the NYSE) are already in X’s.  If this advisor is waiting to get bullish, he has likely missed a good opportunity already.  As mentioned above, I feel especially bad for the clients of advisors like these, because they have access to the best information available (in my opinion), and do not use it. They still have trouble knowing when to take action.

Again, understanding point and figure charts comes with experience and time.  Even the professionals who manage money for a living may not fully grasp some of these concepts.

I often close out my weekly client updates with the line “when the charts change, we will change.”  Meaning, we do not wait for clarification, or a reason why, or an explanation from CNBC why markets may be on the move.  In fact, many of the indicators are early-indicators, often moving before news hits Main Street.

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