Learning to read Price Action with P&F Charting

[Moss Strohem]

Quote from yayt:

Yeah, it seems like you need a decent sum of money to trade P&F with stocks - you could do options but the time value is always an issue. It seems that you'd need options at leasts 2 months from where you enter, based on my observations (small sample).

I was thinking of getting into BNI at 100 but it didn't seem to have a lot of strength when I was watching it - it kept hitting a 100 and then heading back down.

Are you thinking of using options instead of just cash equity? At first I was thinking of getting 2 strikes above the current price but the problem is even if you're right and it eventually gets there, the time decay really hurts to watch. And then again, you could be completely right but wrong about the time, so I don't know whether one should be safe and pay for the extra time value of longer duration options (either in or out of the money) or just going for stocks (which I wouldn't want to do unless I could diversify across at least 10 stocks - not a possibility unless you have about 40K imo)

EDIT: actually, probably more like, AT LEAST 60K

Thoughts?

No. The account net worth is irrelevant. You would like enough so that you can have several positions, and so you can size them for risk but there is no difference between a $1000 position and a $10000 one when you simply do the math backward and set up your R/R for no more than your allowable nominal loss.

I wonder that perhaps the PnF buy/sell signals are being taken as absolute action points and this is where some confusion lies... ...

5k, 10k or 25k into 3 names, 5 names or 10, sizing can be adjusted easily.

 

[Moss Strohem]

Quote from HolyGrail:

The bullish percent chart is a 2% by 3 chart, so it takes a 6% change to start a new column.

The relative strength chart can be anything you so desire. I use the s&p 500, but you can use your stock's sector chart, the russell 2000 etc. It is also a 2% x 3 chart.

From page 126...


All,

Traditionally, the PnF relative strength charts are plotted as a normal price chart and bullish or bearish (buy or sell) signals will emerge to depict strength versus the designated benchmark.

Before the advent of Al Gore's interwebz and the abundance of sector ETF's, a stock's RS was calculated against the DJIA with the following formula (I'll use Friday's values - 01/29/10 - to begin a chart of WMT for illustration purposes):

(Stock MV / DJIA) * 100 = RS value

WMT MV - 53.43
DJIA - 10067

So, (53.43/10067) * 100 = .53074 RS

This is plotted in a price chart and (was) addressed each week thereafter. (With modern technology, they are as up-to-date as the price data is.) They move slowly, but when they speak, they speak clearly. Right now, that value (above) is unreasonably small and there is a reason. The stock has been split frequently and the Dow has not. It used to be that these RS values were higher and easier to plot against benchmarks with default scaling.

Plotting this name (WMT) against the SPY gives a much more usable number, but better yet is to plot it against a sector benchmark such as the .RLX or a similar ETF (which you can subsequently plot against broad market indexes). Eventually, this chart will move into a reversal column (showing short term relative performance) or will give an actual signal such as a PnF buy or sell signal (which is much more meaningful and long lasting -- 2 to 3 years on average).

Mike Moody and Harold Parker had work on the significance of PnF RS published in the February '93 issue of Technical Analysis of Stocks and Commodities. They continue to manage money based on that work.

PnF RS is fairly different from other measures of strength and is the backbone of successful PnF portfolio construction, along side the Bullish Percent Indexes. Its use in short term trading is no less valuable; it's easy to set the strong names apart from the weak ones, and it makes long/short decisions much easier.

Going long...

1) Identify the market posture with low risk BPI's, in X's
2) Identify sector posture with low risk BPI's, in X's
3) Identify strong sectors with RS charts on a buy signal (or at least in X's)
4) Identify strong stocks with bullish patterns in those sectors
5) Enter and manage the trade

Going short... do the opposite.

Markets represent half the risk to a trade, 30% is due to sector risk and 20% or less is do to the actual stock.

 

[Moss Strohem]

Quote from dentist007:

a word of caution here.
the bullish per cent charts are calculated using the chartcraft method. 2% is a longer term box size.so the chart can print a double-top by virtue of a high reading on one day.this does not mean for sure there is a breakout,especially in these volatile markets.the best way round is to go to a 1% box size chart.ie the number of stocks in the index that have a bullish pattern on that box size.time the entry on that.vice versa on a downtrend

Page 126...

You raise a good point here.

Mike Burke (at I.I.) does read buy and sell signals into the patterns of the Bullish Percents. However, getting to the "nuances" someone pointed out on an earlier page - the primary utility of BPI's lie in their range, the levels of their bullishness and their status.

On a scale of 0 to 100%, anything above 70% is regarded as high risk and low opportunity, and the converse is true at/below 30%. Additionally, you have six statuses within the index... Bull Alert, Bull Confirmed and Bear Correction (demand - columns of X's). On the flip side, you have Bear Alert, Bear Confirmed and Bull Correction (supply - in O's).

The Alerts can only come when a column crosses from one side of the lines of demarcation toward 50% (from beyond 30/70).

Confirmed statuses occur after a reversal when a column assumes the same direction and overtakes the previous one - changing from O's to X's back to O's and vice versa; this is where you will see the adjacent buy/sell signal.

Corrections are pauses... changes (usually temporary if oriented toward a higher or lower level) from demand to supply or vice versa.

(NOTE: Again, it's important to regard PnF "signals" as bullish or bearish signals first, then as buy or sell signals. If you get a "buy signal" at 70% or above and act on it, the result will likely disappoint since 70% or more of the stocks are bullish and everyone who wants in is probably already in. These indexes are contrary indicators.)

Melding the field position (level) and status together take some understanding and practice, and that is where the art meets science to make it a craft.


Postscript - perhaps now that it's 8 months after most of these posts were made, this point has already been addressed. But, I've only made it 1/2 way through this great thread. Fortunately, it's a slow, cold weekend.


MS

 

[Moss Strohem]

Quote from flyinglead:

... I was wondering if time movement has any bearing on chance of a good trade.

Next page (??)...


Another good question - time indirectly has an effect because the posture of the market is changing.

Remember, market risk, sector risk, stock risk.


The NYSE BPI was approaching 70% in May/June (getting overbought).

Don't know what the sector risk was - probably up there, too.

The stock pattern looks great in mid may of '08. However, RS versus the SPX was waning since late '07. The stock broke out/up and printed in the 48 area right about the time the BPI reversed down. Being weak, it went with the market.

A bullish catapult in a different market (lower risk position) would have a much better outcome, most likely.

 

[Moss Strohem]

Scratch the above.

I replied to the Tiffany chart with it's Bl. Cat pattern rather than Emerson. Otherwise the same rules apply with a similar outcome.

MS

 

[Moss Strohem]

Quote from flyinglead:



After watching how a couple portfolios performed the last two weeks, Last week I was a King, this week I'm a Chump.

Right now, my mediocre long positions are dragging down the great positions.

I haven't touched anything in my portfolios yet, because I want to see how they do in different trends, and its obvious that even p&f signals don't make you immune to the market, but a few good home runs like CSIQ, PERY and ZEUS will keep a person afloat.


Thanks

From page 143...

The post following this one - by HG - segues right into what needs to be considered. Even as this is after the fact (8 months), the primary market and sector indicators were/are getting toppy.

I suspect you may be generally right with the positions, but it is the market that is exerting its will upon your names. Especially those that may not have superior PnF RS. Fast forward a few weeks from this original post and it becomes clearer with the chart action of the BP's.

It happens with any methodology - you end up seeing fewer objectives met and more stops getting hit at turning points in the market. You doubt your stock-picking abilities, but - in reality - the market is whispering to you.

It was most likely saying that finance related names, among other key market components, were most vulnerable and market breadth was fading. (I remember urging a friend to stay short BAC in early May of that year. He didn't.)

Plenty of longs were beginning to fail. At the risk of being impolite, your timing was/is just off. That's all.


Market, sector, stock.

 

[Moss Strohem]

Quote from weeed7:

Hello to all, and allow me to thank you all for great thread, and of course special thanks to the man that started it all, HG!

I have been following the thread for a while now. And i feel very lucky to have found it. I actually trade the forex,-( that's mostly why i never tried to participate in the thread until today)- and when i tried the P&F, found it to be of great help. But i'm a little confused about a few things, and i'd appreciate any help from you guys, and of course from you HG.

I trade intraday charts, mainly hourly, and m30. Now i know that time in theory is irrelevant in P&F, but when i started using them i found that they are based on the high, open, close, or the low prices. So in my case they are based on the OCHL of each hour. So, again the chart differs notably from one time frame to another. What is confusing to me is that if i use High prices in my chart, i find that the chart ignores the low swings, and if i use Low prices, then my chart ignores the high swings. and the same for close and open prices. Very often these swings are very wide, and cannot be ignored, or considered market noise!

I attached two screen shots of the chart i'm using, one with the chart based on High, and the other one based on the low.
You can see the difference between the high swing and the low swing, and they are both taken at the same time.

What would you advise me?

Hello -

There are no time frames, only box values and box reversal requirements. Also - this does not lend itself easily to intraday charting unless you can segment it into sessions and immediately chart any changes. Many vendors cannot translate the data correctly. There seems to be some confusion on how a traditional 3 box reversal chart develops. It only requires high and low price data. That's it.

Jump into a hand created chart anywhere, in a default scale. (Print out a stockcharts PnF on your favorite $40 name to make it easy.) Make an X or an O - at this stage it doesn't matter... the chart will develop. Let's assume:

We're in X's, so ask

--Did my chart go up one more box? If so add the X (as many as needed to reflect a complete fill of the upward boxes).

--If my chart didn't go up, did it reverse down by three or more boxes (not 2, not 1 - three boxes)? If so, move to the right and down 1 box and create a column of 3 or more O's, as needed.

--If you can do neither, the chart remains static. Move onto your next chart.

If the chart is in O's simply ask the questions to the downside.

Remember, you must stay in your present column unless:
A) you can't add to it, AND
B) you CAN reverse. Otherwise - do nothing.


I've experienced this dilemma many seem to be struggling with. I tried to use information from our Bloomberg machine (yes, Bloomberg machine - we used quotron stations too, back then...) and there was no way to create a proper chart.

5 minutes on the phone with Watson Wright and I was straightened out. I went on to chart between 80 and 100 charts by hand each day for the next 3 or 4 years. Took me 20 minutes a day, tops.

It MUST be learned. You will get to know your stocks intimately. The entire process will make sense, as well.

 

[Moss Strohem]

Quote from staffpro:

ok and in addition to my other question, i was wondering for swing trading would it be better to use maybe one box reversal charts?

for me at least it is easier to see horizontal formations and it just seems that on a 3box chart the gains or losses seem to take weeks- to months (depends on stock) to materialize.

thanks again love this thread and this method thanks HG, Dent007 and pnf and all the others that i forgot who contributed to this thread!!

From page 146...

Staffpro,

It'd be much easier to keep the three box reversal and simply adjust the box values to get the pattern sensitivity you seek. I'm not afraid to throw a .125 box value at a $4 closed end fund. On the other hand, you have to throw 10 or more at GOOG to get it to slow down.

Regarding price objectives -

Bullish objectives on both vertical and horizontal counts are taken from a fresh column of X's that is a NEW buy signal. (Horizontals are taken across the widest part of the base.) Multiply the width or height by three and again by the box value(s) and add the result to the base of your formation or new column of X's. Crossing changing box scales makes it interesting, but it isn't hard.

The result is a potential objective and is influenced by the posture of the market and/or any trendlines in its way. For bearish objectives - first NEW sell signal, use a factor of 2... again giving credence to trendlines and market posture.

 

[Moss Strohem]

Quote from HooLee:

Thank you. BP of your 800 stock database, or SPX index?

From page 150...

Stockchart's NYSE BPI includes 1700 names. Chartcraft and DWA's NYSE database includes more than 2700, I believe (ex closed end funds). A bigger universe is slower to respond.

MS

 

[Moss Strohem]

Quote from subq:

However, the traditional rule is that the X (or O depending on the direction) column must be completed in order to establish a count. It appears he is doing the count of a column that is not completed yet.

From page 154...

When it reverses, it will be a complete count. Until then, it is an incomplete count - still worth heeding. It won't be reduced. It's fair to call it an "at least" price objective... market posture withstanding.