P&F Price Objectives: Vertical Counts
Last updated
Last updated
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Point & Figure (P&F) price objectives can be determined using the vertical count method, which is based on the length of an important column. This can be the column that triggers a breakout or one that forges an important high or low. Once the column is complete, you can apply a simple formula to estimate an Extension and then apply this extension to the column high or low for a Price Objective. These Price Objectives are rough estimates based on P&F charting techniques. There is no guarantee prices will reach the objective.
The first step is to choose the column in which to base the count, which we will call the Count Column. Because this column forms the basis for an upside or downside target, it should be of some importance. Namely, this column should signal some type of reversal or continuation move with an upside or downside breakdown.
Double Top Breakouts and Double Bottom Breakdowns are the most basic P&F signals required to establish a Count Column. The following signals can also be used to establish the Count Column.
Bullish Breakouts. Ascending Triple Top, Bear Trap, Bearish Signal Reversal, Bullish Catapult, Bullish Triangle, Quadruple Top, Spread Triple Top, Triple Top
Bearish Breakdowns. Bearish Catapult, Bearish Triangle, Bull Trap, Bullish Signal Reversal, Descending Triple Bottom, Quadruple Bottom, Spread Triple Bottom, Triple Bottom
Once you've chosen the Count Column, wait for it to be completed to ensure a fixed or unchanging count. The number of filled boxes in a column is not fixed until there is a 3-box reversal. Keep in mind that a column of X's is subject to change until a 3-box reversal forms with three O's in a new column. Once this column is reversed, the number of boxes is fixed, and you can set the count in motion.
Similarly, a falling column of Os isn't complete until there is a 3-box reversal with three Xs in the next column. You can, however, make preliminary Column Counts based on the initial breakout. Remember, these Price Objectives are subject to change until the Count Column is fixed with a 3-box reversal.
The next step is to count the number of X's or O's in the Count Column. This count is multiplied by the box size and the reversal amount to define the Extension. For example, a column of 10 X's on a 1 x 3 P&F chart would yield 30 (10 x 1 x 3 = 30). Remember, a 1 x 3 chart implies 1 point per box and 3 boxes for a reversal.
For bullish breakouts, you would add the projected Extension (30) to the low of the Count Column to attain an upside target. In the chart below, the fixed Count Column measures 14 boxes. Each box is 0.50, and the reversal amount is 3. The total Extension is 21 (14 x 0.5 x 3 = 21). This amount is added to the low of the column for an upside target.
For bearish breakdowns, the total is subtracted from the high of the Count Column to attain a downside target. The chart below shows Computer Sciences with a Triple Bottom Breakdown to set the Count Column. Notice that this column became fixed at 14 when the stock rebounded to 47 with a column of X's. The length multiplied by the box size (0.50) and reversal amount (3) gives us the Extension (21). Subtracting this number from the high of the Count Column yields a downside Price Objective of 29. As noted in the alternatives below, Tom Dorsey advocates using 2/3 of the reversal amount for bearish Price Objectives, which yields a downside target of 36.
Much has been written on P&F charting over the years. As with Dow Theory, it is unclear who created P&F charting and the exact rules. As such, there are different interpretations involving counting methods, the counting column, the projection point, and the need for activation.
In his book Point & Figure Charting, Tom Dorsey advocates a smaller multiplier for bearish Price Objectives. This may be based on the assumption that stocks have an upward bias over the long term. Dorsey's method multiplies the Count Column by the box size and then by 2/3 of the reversal amount, which would be 2 for a 3-box reversal chart. The total Extension is then subtracted from the value of the box at the top of the Count Column.
The above example with Computer Sciences (CSC) shows the 2/3 Extension, which StockCharts.com uses on bearish vertical counts for Price Objectives.
In his book, The Definitive Guide to Point & Figure, Jeremy du Plessis suggests establishing an activation point for vertical counts. Once the Count Column is completed, you should use the high of that column as the activation point for an Upside Extension. A break above this high activates the count, which makes it valid. Conversely, the low of the Count Column becomes the activation point for a downside Extension.
du Plessis also suggests that vertical counts can be made from any vertical column that forges an important high/low or marks the first move from a significant peak/trough. This could be an exceptionally long column that is not part of a breakout, breakdown, or reversal pattern. High-pole patterns could also be considered significant columns for a vertical count.
A.W. Cohen, an early pioneer in P&F charting, advocated starting a count from the high or low of the pattern. Tom Dorsey advocates applying the Extension to the high or low of the Count Column, which is the method used at StockCharts.com. The difference in these two techniques is often negligible because the difference between the high/low of the pattern and the high/low of the Count Column is usually just one box.
Sometimes the box size changes, which requires a counting adjustment. Instead of counting the number of boxes in a column and multiplying by the box size, chartists can simply subtract the column high from the column low. This sum can then be multiplied by the reversal or 2/3 the reversal amount to obtain the Extension estimate.
P&F charts can be displayed with or without trend lines. Rising (blue) trend lines are called Bullish Support Lines, and falling (red) trend lines are called Bearish Resistance Lines. These lines provide a quick snapshot of the direction of the underlying trend.
Many traders advocate trading in the direction of the underlying trend. This means taking bullish signals when the trend is up and prices are above the Bullish Support Line. Conversely, bearish signals are preferred when the trend is down and prices are below the Bearish Resistance Line.
The chart below shows Agilent (AA) with these trend lines. Notice how the stock broke the Bearish Resistance Line and forged a Quadruple Top Breakout with the move above 30 in the last column of X's. This column is not yet fixed because we have yet to see a 3-box reversal. Price Objectives are preliminary until the column length is fixed.
Establishing a Price Objective only covers the reward part of the risk-reward equation. Chartists should also study the chart to assess risk. For bullish patterns and upside price objectives, a move below support or the pattern low would negate a breakout. The box below the pattern low often marks the worst-case level for a pattern failure. Similarly, a Double Bottom Breakdown or a contradictory P&F pattern would argue for a reassessment. For bearish patterns or downside price objectives, a move above resistance or the pattern high would negate a breakdown. The box just above the pattern high often marks the worst-case level for a pattern failure.
Similarly, a Double Top Breakout or a contradictory P&F pattern would argue for a reassessment. There are sometimes indications of potential failure before price hits the worst-case level. Chartists should employ other technical analysis techniques to measure risk and monitor the unfolding trend.
Price Objectives based on a vertical count, horizontal count, or any other count should always be taken with a grain of salt. Consider these targets as broad guidelines. Securities will not always reach their targets; some will even reverse course and trigger conflicting P&F signals before reaching their target. A P&F signal and a target are simply the starting point for analysis. Conditions change, and chartists must regularly monitor the unfolding chart formation for evidence that would invalidate the original premise. Employing other technical analysis tools to confirm or refute a premise is also important. For example, chartists can apply basic trend analysis on a bar chart or use bar chart-based indicators to confirm the findings on the P&F chart.
Thomas Dorsey's Point & Figure Charting examines the basic ideas and key patterns of P&F charts. Dorsey keeps his analysis straightforward; as a relative strength disciple, he devotes a complete chapter to relative strength concepts using P&F charts. These concepts are tied in with market indicators and sector rotation tools to provide investors with all they need to construct a portfolio. Additionally, Dorsey incorporates lessons on how to use P&F charts with ETFs.
